Gold: Another short cover like the one Jesse Livermore forced on Piggly Wiggly?


9:51p ET Wednesday, February 12, 2003

Dear Friend of GATA and Gold:

Here's more commentary from the Globe and Mail in
Toronto about the sacking of Barrick CEO Randall
Oliphant. It notes that Oliphant can hardly be alone
at Barrick in responsibility for the company's big
hedging program. But maybe a point not made in this
commentary is important amid this week's decline
in the gold price. That is, Barrick's board probably
would not be replacing Oliphant so noisily unless it
believed that the trend in the gold price is now
emphatically up, not down.

More on that point shortly from our friend Jim

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Barrick gives Mr. Hedge the boot

Globe and Mail, Toronto
Wednesday, February 12, 2003
Online Edition

Live by the hedge, die by the hedge.

It's not as catchy as "live by the sword, die by the sword,"
but the point is the same: Once you become identified
with something, if it falls out of favour, chances are that
you will too. Barrick Gold's now-departed CEO, Randall
Oliphant, is the latest example. Having become
synonymous with Barrick's hedging strategy, his star
has fallen along with the market's interest in that strategy.

There have been other things that have made life difficult
for Mr. Oliphant lately, mind you, including missed
production targets and weak results. If nothing else, Mr.
Oliphant's sudden departure reinforces the fact that
Barrick is joined at the hip with its founder and chairman
Peter Munk, and if Mr. Munk sees you as superfluous
however integral you might have been beforehand
you might as well polish up your resume. The man
Mr. Oliphant replaced, Paul Melnuk, suffered a similar

Certainly, Barrick's stock has been in the doghouse
lately, largely because of its hedging program. But,
apart from the fact that he is the chief executive, is
it fair to give Mr. Oliphant all the blame for that? Not
really. For one thing, although he is often given the
credit for it, Barrick's hedge program is hardly the
work of a single man. In fact, the man who has
replaced Mr. Oliphant Gregory Wilkins was
Barrick's chief financial officer in the late 1980s when
the hedge program was created.

Nevertheless, as he rose to become chief financial
officer in 1994 (replacing Mr. Wilkins) and then chief
executive officer in 1999, Mr. Oliphant became the
public face of Barrick's hedging program. When
Barrick consistently turned in better results than
most of its major competitors, Mr. Oliphant got the
credit, and when critics complained about the
company's hedging approach, Mr. Oliphant was
there to explain everything.

So is the market's dislike of Barrick's hedging program
well-founded? In some ways, yes in other ways, no.
Much of the criticism comes either from wild-eyed
conspiracy theorists who see the company as in
cahoots with some sort of global cabal, or from those
who don't understand it. At the same time, however,
the market correctly sees Barrick as benefiting less
from rising prices than some other non-hedged

Hedging is something many commodity companies
do, including oil and natural gas producers, because
it protects them from swings in pricing. Aggressive
hedging, in which large amounts of a company's future
production are "sold forward" to lock in a price, makes
sense when the price of a commodity is in a downward
trend, as gold was for much of the 1990s. During that
period, Mr. Oliphant looked like a genius.

Just as some oil and gas companies have found
themselves underwater on their hedges, however,
so some gold producers wound up in serious trouble
due to their hedging including Cambior Gold and
Ashanti Goldfields. Both were forced to buy gold at
high spot prices to fulfill their contracts, and that
helped to give gold hedging a black eye.

Barrick has consistently and correctly pointed
out that it is protected from that kind of event because
of the way its "spot deferred" hedging program is
structured. Since it is one of the globe's largest
producers, it has been able to negotiate long-term
futures contracts on very favourable terms with "bullion
banks." Those banks loan Barrick gold, which it then
sells forward, and then the income is invested. These
loans are then later repaid with gold produced from
Barrick's mines.

Theoretically, if the price of gold rises above the price
of these contracts most of which are held at about
$350 (U.S.) an ounce that creates a liability for
Barrick. However, the company has the right to push
its obligation forward by up to 15 years, thereby delaying
the point at which it has to provide the gold. That allows
it to sell more of its production into the spot market to
take advantage of price jumps.

Mr. Oliphant has argued that Barrick is just as happy
when the price of gold goes up as when it falls since
it is not only able to capture some of that increase
through spot sales, but also sees the value of the gold
it has in the ground increase, boosting the company's
value. That glosses over two things, however. One is
that Barrick can't defer its contracts forever, and the
other is that Barrick's annual production isn't enough
to defray all the liabilities that are implied by its hedges.

Are some of the criticisms of Barrick's hedging program
valid? Yes. However, it allowed Barrick to make more
than $2 billion it would otherwise not have made, cash
which it used to make a number of worthwhile acquisitions.
In the end, of course, all that matters is that Mr. Oliphant
has become synonymous with both hedging and missed
targets and with a declining share price and that is
enough to do him in.


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