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Barrick Gold Earnings Report Doesn’t Add Up

Commodities / Gold & Silver 2009 Nov 05, 2009 - 08:35 AM GMT

By: John_Handbury


Canada’s news may not always get in the limelight, but yesterday’s earnings report from Barrick Gold struck home with me. It just doesn’t seem to add up.

Barrick Gold, the world’s biggest gold company, undertook a strategy to hedge on its gold production by locking in on future gold prices. 

As any farmer knows, hedging makes good business sense since it provides predictability for the revenues and therefore safety for business investments and costs to achieve that production.  Unfortunately for Barrick, this hedging strategy has not been beneficial in a bull market, and they have reportedly lost over $5 billion in potential profit because of it.  Now they are so bitter, and so confident in the future direction of gold prices, that they have made a management decision to forego hedging.

Relevant news clippings from Kristine Owram of Canadian Press are:

“The Toronto-based gold miner, which reports in U.S. dollars, said its quarterly loss included a non-cash accounting charge of $5.7 billion related to its hedging program”.

"We made this decision to gain full leverage to the gold price on all future production based on an increasingly positive outlook for gold," said Barrick chief financial officer Jamie Sokalsky.

“Sokalsky said the company has so far raised a total of $5.1 billion by issuing equities and long-term debt”.

"By eliminating the gold hedge book, the company will fully participate in future gold price movements," Sokalsky said.

The article goes on to say;

“Sokalsky said … as of Wednesday had eliminated 1.1 million ounces of gold hedges, or approximately one-third of its hedged position”.

Something smells funny here.  The above statement infers a total hedge position of 3.3 million ounces.  So how did Barrick lose over $5.7 Billion, which would be about $1,700 per ounce?  Hedging means taking short positions, so to de-hedge their gold positions will mean buying all the short positions back.  Even if the company had lost $300 per ounce, which would be excessive and moronic, the net loss is only about a Billion dollars.

It appears that this $6 Billion “non-cash accounting charge” relates to more than just their hedging losses.  One possibility?  They intend to buy some of the 400 metric tonnes of gold that is being offered up by the International Monetary Fund (IMF).  $5 Billion would be enough to buy almost half of it outright, or all of it on 50% margin.  Barrick may be worried that if the IMF floods the market with this much gold, it will suppress the price, and therefore their profits.  Maybe they think they can sell it into the market better, without depressing prices. If this is the case, Barrick will go from a gold hedger, to a gold hoarder. Let’s just say if this happens, it will certainly give gold prices a big one-time lift.

By: John Handbury Independent Trader

© 2009 Copyright John Handbury - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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