Barrick switches from hedging gold to hedging copper


From Reuters
Thursday, October 5, 2006

TORONTO -- Barrick Gold Corp.'s $1 billion copper-linked debt financing is a cheap way for the world's biggest gold producer to get cash to fund projects, one analyst said on Thursday.

Barrick is selling $1 billion in notes, consisting of $400 million of 5.75 percent notes due 2016 and $600 million of 6.35 percent notes due 2036.

The original $1 billion of funding is to be repaid over three years by selling about 324 million pounds of copper at about $3.08 a pound.

These copper-linked notes will then be replaced with $1 billion of funding in the form of conventional interest-bearing notes maturing in 2016 and 2036.

"They wanted some more debt. It's much cheaper than equity. It gives them capital to fund their projects and it's a cost effective way to do it," said Kerry Smith, analyst with Haywood Securities.

"They lock in some copper price and that just gives them a little bit of downside protection on a third of their production."

The transaction represents less than a third of its copper production over the next three years and 5 percent of its reserves. The company expects to produce 370 million pounds of copper this year.

Proceeds will be used to prefinance some existing debt and fund development projects like Pascua Lama and Pueblo Viejo.

"I think it's fine, they are not going to hedge gold, to them it's securing cash for the development-phased projects," Smith said. Barrick has been aggressively unwinding its forward gold contracts to benefit price of the metal, which is at a multi-year high.

The offering is expected to close on about Oct. 12.

The Barrick notes will be bought by ABX Financing Company, a company incorporated for the purpose of acquiring Barrick notes.

ABX Financing issues conventional interest bearing-notes to fund the purchase of the Barrick notes and enters into copper swaps in order to offset its exposure to copper prices.

"The most important thing for us, was that these notes, at the end of the day, represent a bona-fide unsecured obligation of Barrick that ranks along side with all other unsecured obligations," said Don Marleau, analyst with rating agency Standard & Poor's. "Investors are well protected."

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