Barrick cuts gold hedge by 7.7 million ounces with 13 million left


Gold Bugs Look to Smaller Stocks;
While Barrick Seen as Good Bet,
Analysts See Better Gains
in Small- and Mid-Caps

By Shirley Won
The Globe and Mail, Toronto
Friday, August 4, 2006

Barrick Gold Corp.'s stock may appear to be gaining more lustre thanks to its takeover of Placer Dome Inc. and the elimination of Placer's hedge book, but analysts say the big gains are still to be had with the smaller gold miners.

The world's largest gold producer is basking in a somewhat muted limelight after its record $459-million (U.S.) second-quarter profit that got a big boost from soaring metal prices and the acquisition of Placer last year.

Shares of Barrick fell 28 cents (Canadian) to $35.93 yesterday on the Toronto Stock Exchange after climbing more than 7 per cent in the five days preceding its earnings release after the close of trading Wednesday. On the New York Stock Exchange, its stock finished off 37 cents (U.S.) at $31.83.

"They [Barrick] have been hampered by being overly hedged ... and they still have a significant hedge going forward," Desjardins Securities analyst Michael Fowler said yesterday.

Hedging is a technique in which a company contracts to deliver gold in the future at a particular price. It can protect miners from falling gold prices, but hampers profit in a rising price environment.

On Wednesday, Barrick said it has reduced its hedge book by 7.7 million ounces so far this year. The update came as it announced stellar results that topped the highest full-year profit of $401-million made to date by the Toronto-based gold mining giant.

Barrick's unwinding of the Placer Dome's hedge book is "positive," but the remaining position is still around 13 million ounces if one includes the company's development projects like Pascua-Lama in South America and Pueblo Viejo in the Dominican Republic, Mr. Fowler said in an interview.

The gold giant's growth strategy has been focused on building a pipeline of projects through acquisitions like Placer Dome in March, and a decision to make a $1.3-billion hostile bid for Vancouver-based NovaGold Resources Inc.

While Barrick has some big projects in the pipeline, Mr. Fowler said the problem is that much of that increase will be offset by production declines at maturing mines.

While he has a "buy" on Barrick with a one-year target of $47.50 , he prefers mid-tier gold producers like Iamgold Corp., Kinross Gold Corp., and Agnico-Eagle Mines Ltd.

Veteran gold watcher and analyst John Ing of Maison Placements Canada Inc. echoes a preference for mid- and small-capitalization gold miners over Barrick.

"The hedge book has always been a problem, and maintaining growth has always been a problem," Mr. Ing said. "If you are a gold miner, you have to grow because you are quickly depleting your resource ... Virtual size precludes them from being able to grow other than through acquisitions."

Mr. Ing prefers smaller unhedged gold companies like Eldorado Gold Corp., Agnico-Eagle, Bema Gold Corp., and Kinross, "which have superior growth prospects."

"Barrick would be a more conservative bet," Mr. Ing said. "Rising tides lift all boats. I expect that the $850-level [per ounce for gold] will be surpassed within the next 12 months, and that will lift all stocks."

Hayward Securities analyst Kerry Smith said Barrick is his big-capitalization gold pick, adding that it should only be compared with peers like Newmont Mining Corp. and AngloGold Ashanti Ltd.

Barrick's profit and cash flow are "relatively predictable," said Mr. Smith, who has a "buy" on Barrick with a one-year target of $44 (Canadian). "They are well capitalized. They don't have balance sheet issues."

If you go to smaller gold miners, "their balance sheet may not be quite as good, and they have a lot of their share price predicated on growth, and they have to deliver on that growth," Mr. Smith warned.

"There are more risks attached to a growing company versus a company that is just maintaining the status quo [in production terms], which is what Barrick is doing."