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This year, Munk sermonized about distinctions between hedging and speculation and between the new and the old economies, and how some mining companies are damaging their industry (and investor sentiment) by dumping gold on the market that doesn’t earn a profit.
Munk defended Barrick’s gold-hedging strategy to dispel concerns that have depressed the company’s share price, and to deflect criticism that the practice is hurting the industry while benefiting Barrick.
The practice of selling gold forward came under a cloud last fall when the problems of Cambior and Ashanti Goldfields hit the front pages of newspapers. Both companies lost millions when gold prices spiked upwards, forcing them to sell assets and engage in major restructuring programs that are still ongoing.
“People come away with the conclusion that this hocus-pocus, alchemy-sounding hedging brought these companies down,” Munk said. “[They] think that if hedging is Barrick, and if hedging is inexplicable, then better stay away from this arcane activity.”
The negative publicity affected all gold companies, including Barrick, which pioneered gold-hedging more than a decade ago. However, Munk explained that Barrick’s “rock solid” program bears no resemblance to the “speculative activity” engaged in by certain other companies. “It’s a primitive undertaking. . . . Barrick’s strategy is to take gold in the ground and earn interest on it while taking zero risk.
“Hedging has made Barrick the most profitable gold producer in the world,” Munk stressed. “It has become [our] most distinguishing feature. [Other majors] do not have the ability to generate the kind of additional income [that] we have been able to do with hedging.” He pointed to the company’s $1 billion in profit earned on the production of 16 million oz. gold in the past six years. In contrast, the rest of the Western World lost US$1 billion on the production of 140 million oz. during the same period.
In the past 12 years, Barrick has sold its gold at a price US$66 higher than the spot price, producing an additional US$1.6 billion in revenue. The company currently has 13.4 million oz. sold forward at a floor price of US$360 an oz., which represents 100% of its next two years production and 25% of production beyond that.
Last year, the company restructured its hedging program so that it would be able to participate fully in gold price rallies. “We have the absolute flexibility to choose between our hedge price and the market price of gold, whichever is higher,” said Jamie Sokalsky, chief financial officer.
As for the allegation that Barrick is hurting the industry, Munk argued that the industry is damaged when unhedged companies expose their shareholders to red ink, or when they are forced to sell gold in a down market to appease nervous bankers. “What can justify dumping gold on the market that doesn’t earn a profit?” he asked rhetorically. “Hedging is the only means to regain the confidence of the capital markets.”
Munk also said he expects that the distinctions between old and new economies will fade over time, making it easier for profitable mining companies to compete for investment capital against high-technology ventures. “The distinctions will be between those companies that make money and those that lose money. That’s the way business works. That’s the way it has always worked. And that’s why I’m confident Barrick will come out ahead.”
President Randall Oliphant then outlined Barrick’s plans to boost production to 5 million oz. by 2003 from its current 3.7 million oz. This will be achieved by developing three new mines: Rodeo in Nevada; Pascua-Lama in Chile and Argentina; and Bulyanhulu in Tanzania.
Rodeo will come into production in the second half of 2001 at the rate of 350,000 oz. per year and at a cash cost of US$160 per oz. Bulyanhulu is scheduled to begin production next year and ramp up to about 400,000 oz. per year at US$130 per oz., rising to 500,000 oz. in later years, once deeper ore becomes available. Pascua-Lama is expected to produce 800,000 oz. gold and 35 million oz. silver, beginning in 2003, rising to more than 1 million oz. thereafter. Costs are expected to average US$100 per oz. over the life of the mine, including US$60 per oz. in the first five years.
Barrick expects to produce 3.7 million oz. this year at a cash cost of US$145 per oz., the lowest in the industry.
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