The rising price of gold has seen Barrick Gold Corp, the world’s biggest gold producer, reveal plans to eliminate all of its gold hedges and raise $US3 billion ($A3.5 billion) in an offering of shares to help pay for the move.
The Toronto-based company said on Tuesday it made the decision because of an increasingly positive outlook on the price of gold with the huge spending stimulus packages, big debt burdens and the prospects for higher inflation in coming years.
The announcement came on the same day as the world gold price broke over the $US1,000 an ounce mark for the first time in six months and the highest in 18 months, before easing back under the key price level.
Barrick joins a growing list of gold groups cleaning up their balance sheets by eliminating hedges, which have seen it and others miss some of the rise in the price over the past seven years.
The company joins Australian majors, Lihir and Newcrest which have gone down that route, and in doing so, have attracted far greater interest from investors looking for a pure, unhedged gold play.
Barrick said in its statement it believes the gold hedges hurt its appeal to the broader investment community and its share price.
It said it had "an increasingly positive outlook on the gold price.
"The Company expects global monetary and fiscal reflation will be necessary for years to come, resulting in an increased risk of higher inflation and a future negative impact on the value of global currencies; and
"Continuing robust gold supply/demand fundamentals.
"In addition, Barrick believes that the Gold Hedges and the Floating Contracts were adversely impacting the Company’s appeal to the broader investment community and hence, its share price performance."
Barrick will issue about 81.2 million shares at $US36.95 per share under a bought deal underwritten by a syndicate led by RBC Capital Markets, Morgan Stanley, JP Morgan and Scotia Capital.
It said it will use $US1.9 billion ($A2.22 billion) to eliminate all of its fixed priced gold contracts within the next 12 months and another $US1 billion to eliminate a portion of its floating spot price gold contracts.
The company will take a $US5.6 billion ($A6.55 billion) charge to earnings in the third quarter as a result of a change in accounting treatment for the contracts.
"The gold hedge book has been a particular concern among our shareholders and the broader market which we believe has obscured the many positive developments within the company.
"As a result of today’s decision, we have addressed that concern and maintained our financial flexibility," said Aaron Regent, President and Chief Executive Officer.
In a separate deal Barrick also agreed to sell silver reserves from four of its mines to Silver Wheaton Corp in a deal worth $US625 million ($A730.82 million).
The transaction will provide Toronto-based Barrick with a source of financing for its Pascua-Lama mining project, which is under construction on the border between Argentina and Chile, while it significantly boosts the size of the 5-year-old Silver Wheaton.
Barrick said that when in full production, Buzwagi, Cortez Hills, Pueblo Viejo and Pascua-Lama are expected to collectively contribute about 2.6 million ounces of production at lower total cash costs than the current Barrick profile.
Mr. Regent added: "Against a backdrop of higher gold prices, we expect to see significant margin expansion and cash flow growth".
For 2010, Barrick expects production to grow to 7.7-8.1 million ounces at lower total cash costs than 2009.
As of September 7, 2009, Barrick’s Gold Sales Contracts, which are comprised of the Gold Hedges and the Floating Contracts, totaled 9.5 million ounces with a mark-to-market ("MTM") position of negative $5.6 billion.
The Vancouver, British Columbia-based company agreed to pay $US625 million in cash over three years.
Comex December gold futures rose $US3.10 to settle at $US999.80 an ounce on Tuesday in New York; it then eased Wednesday to around $US991 an ounce.
December silver jumped 22.5 cents to $US16.50 an ounce and touched a 13-month high of $US16.86.
