Barrick should close last hedges, Citigroup analyst says


By David Pett
National Post, Toronto
Friday, August 3, 2007

Now that Barrick Gold Inc. has fully eliminated its "corporate" hedge book, rendering ongoing operations 100% exposed to spot gold prices, its time Canada's largest gold miner rid itself of the remaining 9.5 million ounces left on its "project" hedge book, according to Citigroup analyst John Hill.

"We regard de-hedging as the single most powerful lever that Barrick can pull, particularly since cash is piling up on a 'lazy' balance sheet while project timetables continue to stretch out," Mr. Hill said in a research note.

He told clients that Barrick's project hedge book, which totals 9.5 million ounces at a forward price of US$306 per ounce, equates to a mark-to-market loss of approximately US$3.5-billion based on the current spot price for gold that was hovering around US$664 an ounce on Friday.

Mr. Hill believes de-hedging would erase the discount valuation in the stock and add $3 to $5 per share to Barrick's net asset value based on expectations that gold will keep climbing.

In fact, it could even drive the gold price higher by $30 to $40 per ounce, the analyst added.

Barrick, however, appears reluctant to unwind its "project" hedge, choosing instead to view it as an important financing tool for projects such as Pascua-Lama in Chile and Argentina, Mr. Hill concluded, adding the hierarchy of capital allocation seems to be projects, dividends, buybacks then dehedging.

Mr. Hill has a "buy" rating and US$43 price target on Barrick shares.

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