Barrick Unhedges: Stock Soars

December 2, 2009 Company Profiles, Gold Stocks No Comments

Gold is continuing its run up to another new high, but that is not the big story. The big story that broke yesterday was about about Barrick’s (ABX) hedge book, or lack there of, as of yesterday. Gold reaches a new high while Barrick becomes completely un-hedged and ABX’s stock takes off. Barrick believes in the product that it is producing, and will now fully participate in the rise of gold going forward!

Barrick Stock Soars After Unhedging Announcement!

Barrick shares jump over 7% on hedge book closure

The move to eliminate completely, its fixed price hedge book, means the group can now take full advantage of record gold prices currently above $1,200 an ounce.

Author: Cameron French (Reuters)
Posted: Wednesday , 02 Dec 2009

TORONTO (Reuters) -

Barrick Gold Corp (ABX.TO: said on Tuesday it had completely eliminated its fixed-price hedge book, allowing the company to take full advantage of rising gold prices and sparking a 7.6% rise in its shares.

Perhaps appropriately, the announcement came on a day the price of gold hit $1,200 for the first time, as the hedges — which totaled 3 million ounces before Barrick began buying them back in September — had become a symbol of the company’s inability to benefit from a favorable gold environment.

“As of today, we are a fully unhedged gold producer,” Barrick Chief Executive Aaron Regent said at an investment conference in New York.

The elimination of hedges comes earlier than the company had planned. Barrick said in September that it would get rid of all its hedges within 12 months, but sped up the pace due to the continued rise in gold prices.

“Our positive view on the gold price led us to accelerate the elimination of these contracts ahead of the schedule we had established,” Regent said in a statement.

Gold XAU= has jumped 25% since the end of August, helped by a weakening U.S. dollar and fears of inflation.

Gold companies typically hedge, or agree to sell gold at a future date at a fixed price, to either finance projects or protect against falling bullion prices.

But with gold having nearly quintupled since 2001, Barrick was losing potential revenue each time the price ticked higher. This has weighed on Barrick’s stock and prompted complaints from shareholders, which Regent listened to after he took over as the company’s CEO early in January.

TOOK $5.7 BILLION CHARGE

Barrick issued equity and debt worth more than $5 billion to fund the elimination of the gold hedges, and took a $5.7 billion charge in the third quarter to get the hedging losses off its books.

The company said it would take an additional $300 million charge in the fourth quarter, as rising gold prices forced it to repurchase gold at higher costs — $1,070 an ounce on average — than it had originally anticipated.

“We believe investors had given the company a clear mandate to close the hedge, and that an attempt to time the market would have been badly received,” said George Albino, an analyst at Macquarie Equities Research.

Albino said the question now was how the gold market would react, as Barrick will no longer be buying up ounces to fill the hedges.

Barrick’s shares were up C$3.41 at C$48.27 on the Toronto Stock Exchange, touching a 10-month high.

The company has also been closing out 6.5 million ounces of floating hedge contracts, whose liability does not change with the price of gold. The company said it has reduced the obligation on those contracts to $700 million from an initial $3.7 billion.

Barrick expects to produce between 7.7 million and 8.1 million ounces of gold next year.

The company has not unveiled guidance past that point, but Regent said on Tuesday that the company’s production should continue to trend higher past 2010, while extraction costs should come down as the company opens larger lower-cost mines.

As soon as we get a surprise like this from the world’s largest gold producer, it is only fitting that we start getting talk of a current gold bubble from the most unlikely source. The further you look into it however, it makes more sense. The Chinese want to acquire more gold, so they start the “bubble” rumor themselves. This will then enable them to step in and buy a large chunk once they get the desired correction. Be smart and go with the big money, buy the dips in gold! On a lighter note, Jon Nadler is going to jump all over this one.

Chinese central bank wary of gold bubble

Reuters Published: Wednesday, December 02, 2009

TAIPEI — Gold prices are currently high and markets should be careful of a potential asset bubble forming, a senior official at China’s central bank said on Wednesday, as prices for the precious metal hit a record high.

“We must keep in mind the long-term effects when considering what to use as our reserves,” Hu Xiaolian, a vice-governor at the People’s Bank of China, told reporters in Taipei, when asked if China had plans to increase its gold holding in its foreign exchange reserves.

“We must watch out for bubbles forming on certain assets, and be careful in those areas.”

Gold hit record highs at US$1,216.75 an ounce in Europe on Wednesday as investors bet on higher prices.

China’s more than US$2-trillion in foreign exchange reserves are mostly parked in U.S. treasuries, despite calls from some in China to invest the reserves in oil and other natural resources that the fast-growing Chinese economy will need in future.

Before gold prices hit record highs, however, China said last month that it is working to improve the allocation of assets in its foreign exchange reserves, when asked whether it would buy any of the gold that the International Monetary Fund is seeking to sell.

The Chinese know that this gold bull market is not ending any time soon. They base their strategies on the long term. You are witnessing a deliberate strategy designed to position the Chinese government to acquire large amounts of gold at a much better price than the current price. When the correction comes gold will go back down, and maybe as low as $1,045, but you will see, if it does test that level, that it won’t be for long.

Here is an interesting video which may go to promote the bubble theory as it gains traction, or maybe it is the result of what happens when the government chooses to demonize a select portion of the business world in order to distract from its political agenda!

Interesting to say the least, or maybe they are just “cow-boying up” while it’s still legal. Maybe the brokers of Goldman Sachs are not as stupid and greedy as they are portrayed.

Till next time, good luck and good trading!