Barrick to raise more than $3.5 billion to eliminate gold hedges

As the price of gold surpassed the critical US$1,000 per oz. mark on Sept. 8, Barrick Gold (ABX-T, ABX-N) announced it would eliminate its gold hedges — derivative instruments that protect it against a fall in the gold price.

To do that the world’s largest gold producer says it is raising about US$3.5 billion by issuing 94.8 million shares at a price of US$36.95 per share.

Barrick plans to use US$1.9 billion from the public offering to eliminate all of its fixed priced gold contracts or hedges within the next 12 months and about US$1.5 billion to eliminate a portion of its floating spot price gold contracts.

Barrick’s gold sales contracts, which consist of gold hedges and floating contracts, totalled 9.5 million ounces with a mark-to-market position of negative US$5.6 billion as of Sept. 7. The US$5.6 billion will be recorded on the balance sheet as a liability with a corresponding charge to earnings in the third quarter of 2009.

A weaker dollar, which is driving a move into harder assets like gold, and growing fears that the balance of payments and fiscal situation in the U.S. has gotten too out of hand, is fuelling inflationary expectations and convincing many investors that the price of gold can only move higher.

Other reasons to be positive on the metal include strong demand from China, where the central bank in recent months has turned into a net buyer rather than seller, and lower scrap generation.

“We’ve been saying that the price of gold could spike up to US$1,200 per oz. over the next six to nine months and then come down,” says a New York-based bullion trader who asked not to be identified. “We expect the price to trade between US$800-US$1,100 per oz. over the next ten years.”

Patrick Chidley, a senior mining analyst at Barnard Jacobs Mellet in Stamford, Connecticut, believes Barrick’s decision makes sense. “The deal obviously is dilutive to earnings and to the share base but nonetheless they are issuing quite expensive stock so it’s probably a good time to do it and they’re certainly making the most of it,” he says.

“They previously refused to eliminate their hedge book and my conversations with the company indicated that they thought they had better things to invest cash in, but now it appears they have changed their minds — perhaps as a result of the new CEO. Whether that means they don’t believe they have that many attractive projects to invest in anymore or whether they genuinely believe the gold price is going up, I don’t know.”

Chidley expects gold to trade within a US$950-US$1,000 per oz. range in the short term but admits it could spike as high as US$1,100 per oz. — although resistance at the US$1,000 per oz. level appears to remain strong.. Longer term, he is bullish on gold.

“If the price of gold goes up considerably, Barrick’s decision to eliminate its hedge book will  be a smart move, if the gold price stays where it is, I think the jury will be out on it,” he says. “In hindsight it is a move they perhaps should have done a long time ago, though.”

Barrick’s shares outstanding are expected to rise from about 873 million shares to roughly 968 million shares (982 million shares if the over allotment option is exercised).

In Toronto on Sept. 9, a day after Barrick made the news public, Barrick closed down $2.74 per share or 6.45% to $39.71 per share with 11.8 million shares trading hands. In New York the stock lost US$2.35 or 5.98% to close at US$36.95 per share, with 11.43 million shares changing hands.