Barrick Gold will issue $3 billion in stock to eliminate all of its fixed-price gold hedges and a portion of its floating hedges, taking a $5.6 billion hit to third-quarter earnings, the world's top gold miner said on Tuesday.Presumably they're buying out the contracts at market prices, making this a strong bullish bet on gold prices (not only do they now have directional exposure, they've also assumed the risk of earnings volatility that was hedged away before).
For Barrick, which expects gold prices to keep rising, the deal should remove what has been a big drag on its shares, the legacy of the company's past reliance on hedging, a practice it abandoned in 2003.
The supports rationale the NYT cites seems questionable, though:
A raging gold market also made the timing right, the source said.Unless you are a big believer in the commodity super-cycle, a "raging market" should sound like a market peak, i.e. a good time to lock in long-term prices for your production... and yet Barrick is doing the exact opposite.
Only time will tell how this works out, but it is a naked directional bet - and not as sure a thing as media coverage would have you believe.
Update: The investor community seems to like it - the offering was so oversubscribed that they've raised their target to $3.5bn.
Update 2: The broader market isn't as convinced the move will add value for existing shareholders - Barrick is down 6%.
Update 3: My favorite finance blogger Felix Salmon agrees with me, only more harshly:
And then there are the hedges which just don’t make any sense at all: like Barrick Gold, which locked in low gold prices and is now spending a whopping $3 billion to unlock them at the top of the market. Anybody care to explain that one to me?
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