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Barrick Sells Billions in Shares to Buy Back Hedges
Barrick Gold announced on September 10, 2009, that gross proceeds from a sale of its shares would total about $4 billion, most of which will be used to eliminate forward gold sales contracts (hedges), and subsequently announced on September 23 that the deal had closed. Barrick’s initial announcement on September 7 called for sale of $3 billion in shares; however, an increase in shares bought by the public and by the underwriting syndicate led by RBC Capital Markets, Morgan Stanley, J.P. Morgan Securities and Scotia Capital, increased the total to $4 billion. Thomson Reuters reported that, according to its data, the Barrick transaction was the largest single sale of a company’s stock in Canadian history.
In its September 7 announcement, Barrick said it will use $1.9 billion of the net proceeds to eliminate all of its fixed priced (non-participating) gold contracts within the next 12 months and approximately $1 billion to eliminate a portion of its floating spot price (fully participating) gold contracts. The fixed price contracts will be eliminated through purchase of gold in the open market and/or delivery of gold from Barrick’s production. No activity in the gold market is required to settle the floating contracts. The company will record a $5.6-billion charge to earnings in the third quarter of 2009 as a result of a change in accounting treatment for the contracts.
Barrick said it is closing out its hedges to gain full leverage to the gold price on all future production “due to an increasingly positive outlook on the gold price and continuing robust gold supply/demand fundamentals.” The company expects that 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.
Also, Barrick President and CEO Aaron Regent said, “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. 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.”
Barrick’s current development projects include Buzwagi in Tanzania, Cortez Hills in Nevada, Pueblo Viejo in the Dominican Republic, and Pascua-Lama in Chile and Argentina. When these projects reach full production, they will collectively add about 2.6 million oz to Barrick’s annual production at lower total cash costs than the current Barrick profile.