Barrick Gold Raises $3B to Eliminate Gold Hedges

This is big news. Barrick Gold was suspected from trading today for a crucial announcement. The company is raising $3B in a public offering. $1.9B of the proceeds will be used to eliminate all of its gold hedges. Presumably, they expect gold to fly much higher.

A $5.6 billion charge to earnings will be recorded in the third quarter as a result of a change in accounting treatment for the contracts.

3-month chart:




Official announcement:

Barrick Announces Plan to Eliminate Gold Hedges
Launches $3 Billion Public Equity Offering
Press Release
Source: Barrick Gold Corporation
On Tuesday September 8, 2009, 4:53 pm EDT
Barrick Gold Corporation (NYSE:ABX - News)(TSX:ABX - News) announced today that it has entered into an agreement with a syndicate of underwriters, led by RBC Capital Markets, Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc. and Scotia Capital Inc., for a bought deal public offering for gross proceeds of approximately $3.0 billion representing 81.2 million common shares of Barrick at a price of $36.95 per share.
Barrick intends to use $1.9 billion of the net proceeds to eliminate all of its fixed priced (non-participating) gold contracts (the "Gold Hedges") within the next 12 months and approximately $1.0 billion to eliminate a portion of its floating spot price (fully participating) gold contracts (the "Floating Contracts"). A $5.6 billion charge to earnings will be recorded in the third quarter as a result of a change in accounting treatment for the contracts.
Barrick has made this strategic decision to gain full leverage to the gold price on all future production due to:
- an increasingly positive outlook on the gold price. The Company expects global monetary and fiscal reflation will be necessary for years to come, resulting in an increased risk of higher inflation and a future negative impact on the value of global currencies; and
- continuing robust gold supply/demand fundamentals.
In addition, Barrick believes that the Gold Hedges and the Floating Contracts were adversely impacting the Company's appeal to the broader investment community and hence, its share price performance.
"The gold hedge book has been a particular concern among our shareholders and the broader market which we believe has obscured the many positive developments within the company. As a result of today's decision, we have addressed that concern and maintained our financial flexibility," said Aaron Regent, President and Chief Executive Officer. "With the industry's largest production and reserves, Barrick provides exceptional leverage to the gold price, which we expect will be further enhanced as we build our new generation of low cost mines."
When in full production, Buzwagi, Cortez Hills, Pueblo Viejo and Pascua-Lama are expected to collectively contribute about 2.6 million ounces of production at lower total cash costs than the current Barrick profile. Mr. Regent added: "Against a backdrop of higher gold prices, we expect to see significant margin expansion and cash flow growth."