Barrick issues shares to close out hedges

The Globe & Mail is reporting that Barrick, the largest gold company in the world and one of the largest companies in Canada, is closing out a big chunk of its hedges using proceeds from a massive share sale:

In a major bet that gold's rally has a long way to go, Barrick Gold Corp. unveiled plans to largely eliminate its troublesome gold hedge book with a massive equity issue worth as much as $3.45-billion (U.S.) – potentially the largest stock sale in Canadian history.

On a day when the price of gold topped $1,000 (U.S.) an ounce, the Toronto-based company said it is selling 81.2 million shares at $36.95 each. It will use the proceeds to eradicate more than half of its hedge contracts which have locked the company into receiving a fixed price for some of its gold production.

The world's largest gold miner, Barrick produces about 8 million ounces a year. But its hedge book totals 9.5 million ounces, fixed at prices hundreds of dollars less than the $1,009 gold hit yesterday.

As The Globe & Mail article suggests, this like it is the largest share issuance in Canadian history (although, if you adjust for inflation I suspect this wouldn't be the largest.) Barrick is issuing almost 10% of its market cap.

The market always discounted Barrick because of its hedge book. Barrick profitted immensely in the 90's from hedges (when gold was declining) but it has been a drag for the last 5 or so years. As reported above, Barrick's full hedge book is slightly more than one year's worth of production. The erosion of the hedge book will attract those who are extremely bullish on gold.

From a contrarian point of view, this is probably bearish for gold. Although there is no proof and one can't blindly assume this, you often see bull market peaks marked by major corporate actions that turn out to be a mistake. The classic one in recent memory is the AOL-Time Warner merger in 2000. More recently, one may recall how some of the biggest base metal M&A deals were done in the last two years, which may also mark a multi-decade top in base metals (too early to call an end to the base metals bull market but I suspect base metals, and probably all commodities, have entered a bear market.) Those massive mergers, in hindsight, are turning out to be some of the worst deals in the last decade.

Will the Barrick share issuance mark the top? Time will tell...


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