09/10/09 Baltimore, Maryland
Barrick Gold, the world’s largest pure-play gold miner, is about to make a very big bet on gold prices going higher. The company announced this week it will raise as much as $4 billion in a stock issuance and use the proceeds to pay off its gold hedges. In other words, Barrick is willing to give their shareholders the short-term shaft in order to rid themselves of all bets against gold.
“It’s nothing but bullish for gold,” says our resident mining watchdog, Byron King. Barrick evidently believes that the future price of gold is heading up. So Barrick wants to eliminate the drag of lower-priced hedges, presently covering 9.5 million ounces of future output.
“The math works out to about $370 per ounce, hedged. Barrick must think that it’ll make it all back in the future, out of higher gold prices — $1,350 per ounce and more.
“The other side of this golden coin is that Barrick still has to buy smaller mines and miners with which to replace its annual gold output of about 8 million ounces. There’s no way that Barrick can ‘discover’ this quantity of gold every year, using its own, decimated in-house geological and engineering talent.
“In other words, Barrick has to drill for gold on Wall Street and other stock exchanges of the world.
“I have nine suitable candidates for Barrick takeouts in the Energy & Scarcity Investor portfolio. And if Barrick doesn’t buy one or more of these guys, well… they’re all good companies going forward, digging and selling gold.”
Sign Up for The Daily Reckoning e-letter and receive a chapter from the new Financial Reckoning Day... FREE!
We Value Your Privacy.
i would be interested in knowing what penalties barrick owes to its counter parties for defaulting on the hedges…maybe their contracts allowed them to unwind in this fashion but even so it will make future customers think thrice about doing business with them…
and what is the ripple effect?….did jpm buy from barrick for delivery to some other client? maybe it’s less complicated than i think…
antal fekete essentially answers this question in an article 9/10 – to wit: the consequences for barrick will be huge…he thinks that they may be carved and divied up for stronger hands…
barrick’s management was completely incompetent morons…i keep asking why higher education is a requirement for business jobs when i see such gross stupidity here and all over the financial and government sectors….these expensive educations are utterly useless on low iq minds and those without critical thinking capacities….and no, i am not playing monday morning quarterback….fekete specifically warned barrick in person 12 years ago against their strategy of forward selling which it stupidly called hedging…
I’m bullish on gold, but I don’t know why I should trust Barrick’s prognostications. They shut down a perfectly good mine here in western South Dakota at almost precisely the bottom of the gold price in the late 1990’s because it wasn’t profitable to run. They can’t restart it because they’d have to correct all the previously grandfathered in violations of environmental regulations. It’s going to be an underground science lab now instead. If the geniuses at Barrick could forsee the future, they never would have done that.
Question. If Barrick is so knowledgable re the price of gold, why did they hedge3 so much at the prices they selected? They used this as a means of atracting buyers of their stock. I was one. I got out when gold started going higher, shifting to Newmont and later Goldcorp. Barrick is betting heavily on gold prices increasing. Does any one trust their prognosticating abilities?