The godfather of gold hedging,
“The commitment to hedging is gone,” Munk told Reuters. “Hedging to us is no longer a requirement for running our business as it no longer creates shareholder value.”
Curiously, the announcement, which represents a complete break with Barrick’s 20-year history, came only a day after Munk gave a spirited defence of his company’s hedging program to delegates attending a gold conference in London. (Munk seems to have taken on a more active role in Barrick since Gregory Wilkins replaced Randall Oliphant as president earlier in the year, after Oliphant’s very public firing.)
Throughout the recently ended bear market for gold, Barrick made an extra US$2 billion in profits, thanks to its hedging program. These extra funds gave the company the financial muscle to carry out two major acquisitions, Sutton Resources (in 1999) and Homestake Mining (in 2001), when gold prices were at their nadir.
“Part of a hedging policy is to provide downside protection, and in an environment of higher gold prices, lower interest rates and [Barrick’s] strong balance sheet, there is less rationale for that,” Munk told Bloomberg in a follow-up interview.
But he did not say Barrick would make any particular moves to reduce its hedge book, which has remained unchanged over the past few months at 16.1 million oz. hedged at an average of just US$311 per oz.
This hedge book, created with 19 counterparties, represents about three years of production at Barrick’s 2003 rate of 5.5 million oz. annually (at a total production cost of about US$274 per oz.) and 18.4% of Barrick’s global 87-million-oz. reserve base. The ultimate termination date on the gold hedge contracts is said to be 2013 in most cases.
Barrick has previously stated it would like to reduce it hedge book to represent only two years of production, but so far it has made few moves to achieve this goal.
Munk did say de-hedging was an option: “We could well do that in terms of assigning contract positions to our long-term [project] financing plans.”
With gold prices rising this year above the hedge book’s US$340-per-oz. floor level (for 2003 only), Barrick has elected in recent quarters to sell its gold directly into the spot market rather than wind down its hedge book in the manner carried out by other companies, such as
At Sept. 30, 2003, with gold trading at US$385 per oz., the mark-to-market value of Barrick’s gold hedge book was a staggering minus US$1.2 billion — a sum offset by a positive US$185-million mark-to-market value on its foreign currency position.
Today, every US$1 increase in the price of gold adds another US$16.1 million to this negative gold-hedge value; every US$50 increase adds US$805 million.
Barrick points out it has two significant financial covenants related to its hedge book: the company must maintain a minimum consolidated net worth of at least US$2 billion (it was US$3.4 billion on Sept. 30, 2003), as well as maintain a maximum long-term debt to consolidated net-worth ratio of 1.5-to-1 (it was 0.25:1 on Sept. 30).
Barrick has also hedged 32.5 million oz. silver at prices close to today’s. Deliveries are scheduled over the next 10-15 years.
Barrick still has about US$1 billion in cash, US$319 million in other current assets, and US$1 billion in undrawn credit. This year, the company has spent US$154 million buying back 8.8 million shares at an average price of US$17.56 per share.
On the bottom half of the balance sheet, the company has US$1.9 billion in liabilities consisting of US$489 million in current liabilities, US$754 million in long-term debt, US$408 million in other long-term obligations, and US$262 million in deferred income-tax liabilities.
Munk’s anti-hedging comments on Nov. 21 briefly lifted gold by US$4 to US$397.30 per oz., and boosted Barrick shares by 50 to C$28.50. By presstime, the yellow metal was trading at US$392.60 per oz. while Barrick shares were steady at C$28.49 and US$21.71.
Barrick shares have risen about 20% in the past year, trailing the performance of unhedged producers such as Goldcorp, which is up 40%, and Glamis Gold, up 60%.
In New York trading, with the greenback in decline, Barrick shares have risen about 50% over the past 52 weeks, compared with a 100% gain in the Amex Gold Bugs Index, which consists of unhedged producers.
Next year, Barrick expects production to fall 10% and costs to rise 10% as several key operations, including Pierina in Peru and Goldstrike in Nevada, mine lower-grade material.
With a market capitalization of US$11.6 billion, Barrick ranks as the world’s second-biggest gold company by market cap, after Newmont Mining, at US$18.7 billion.
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