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Gold Price Today, Barrick Gold’s Q3 to Show De-hedging Progress

Commodities / Gold & Silver Stocks Oct 29, 2009 - 07:19 AM GMT

By: Miles_Banner


Best Financial Markets Analysis ArticleBarrick Gold is a perculiar investment to analyse. It’s past is steeped in mystery, some good, some bad. We’re not here to judge this on their morals, just their investment potential.

As a brand in the gold mining sphere, it’s a powerhouse. The largest gold producer in the world by market cap and annual production. Barrick Gold is listed on the New York Stock Exchange under the ticker ABX. It has a market cap of $30.21bn (£18.43bn) and has a P/E ratio of 46.92.

We bring Barrick Gold to your attention because it has been in the news of late. Notably for buying back it’s hedged positions and for acquiring the new mine in Chile (El Morro). Today is an important day for Barrick shareholders as this is the day they release their 3rd quarter results.

In these results we expect to find how Barrick have progressed with clearing their hedge positions. When we look at the business of Barrick it is easy to see why they would want to clear their hedged positions and why they would want to acquire the El Morro mine.

Back in September Barrick announced that it planned on eliminating it’s entire hedge position. The company has been losing in the range of 700 dollars for every ounce of gold they sell. These positions have accumulated over many years, but many are believed to have been made back in 2002 when the price of gold was roughly $300 an ounce. Since 2002 the gold price has risen sharply.

Barrick has been making a loss on these hedge positions for a number of years and it has continually attempted to reduce the size of these shorting positions.

Hedging works by selling something to the market now with the promise to deliver the goods at a later date. This allows Barrick to get a price per ounce on the gold they have not yet produced, which means they can guarantee a price and have an immediate cash flow.

Hedging is the same as a futures play [find out about gold futures here]. Effectively what Barrick are doing by having these positions is ’shorting’ the gold price. They are betting that the price of the gold they produce will go down in value by the time they have delivered it otherwise they lose out. In a cruel turn of events the gold price has rocketed since many of these hedge positions were first made.

Fast forward a few years to the present and the price of one troy ounce is now approximately 1000 dollars… 3 times as much as when these positions were opened.

Barrick is the biggest player in the gold mining market. They have predicted production at a staggering 7.4m ounces for 2009. Because they lose out on every gain in the gold price that’s a heavy loss to keep making and it’s why they are so keen to eliminate this burden.

Barrick’s hedged positions

The amount of their hedged positions is a staggering 9.5 million ounces. This is made up of 3m ounces of gold in fixed price hedges and 6.5m in floating hedges.

So why are they attempting to clear these positions now? Why not years ago?

Well actually Barrick has attempted to reduce the size of its hedge in the past. Last year for example, in 2008, it managed to reduce it by 1m ounces. But it seems the urgency has been created by the surge in the gold price. As the gold price rises so has Barrick’s share price.

Below you’ll Barrick’s share price rise from 13.91 back in 2002 to 34.58 dollars per share closing price yesterday.

Barrick is attempting to remove its hedged positions by capitalising on this increased share price. It will partly fund the purchasing of its hedged positions by issuing new shares to the value of $3bn.

This brings us to the effect of clearing Barrick’s hedge book from the market. Barrick’s fixed hedge book is equal to 4% of total world gold production. That’s a sizeable chunk of the market. Removing that will tighten the world supply of gold and could lead to an even higher price.

In our humble opinion Barrick is a gold mining giant. It has been trying to reduce its restrictive hedge positions over a number of years. Now that the gold price has reached a high amount and Barrick’s share price has rallied off the back of it this is an ideal time to cash in. Nothing is guaranteed with the market. The price of gold could carry on going up and it could go down. This is an opportune moment for Barrick.

Once it has cleared it’s hedged positions we’ll see a more robust Barrick intent on expansion, as seen by it’s recent acquisition of the Chilean mine, El Morro. The only cause for concern is how much it will lose to cover those positions.

Overall their past shows them to be an aggressive company that delivers experienced personnel with good mining results. Their financial muscle should also come in handy during these depressed times.

I hope you’ve found this useful. We’ll keep mining through the news until next week,


Gold Price Today

P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (

© 2009 Copyright Gold Price Today - 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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