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Unrealized loss on Barrick''s gold hedging nears $2 billion
By Nicole Mordant
Friday, February 13, 2004
VANCOUVER, British Columbia -- Barrick Gold Corp. said
Friday it was prepared to lose out on higher gold prices on
a third of its output this year as it lives up to a promise
to wipe out its bulky hedge book.
The Toronto-based miner, the world's third-largest bullion
producer, owns the gold industry's biggest hedge book,
a thick pile of contracts it entered into over many years
to lock in prices for its as yet unmined gold.
Barrick scored when the gold price was weak but the
metal's 65 percent gain in the past three years to over
$400 an ounce has overtaken the price it has pre-sold
much of 15.5 million ounces of its production.
Hedging has become unpopular with investors, who want
to see the full benefit of today's high gold prices.
Chief executive Greg Wilkins said on Friday the company
would deliver at least 1.5 million ounces out of anticipated
production of 4.9 million to 5.0 million ounces in 2004 into
hedge contracts, even if it means losing money on sales.
quot;We will accept the opportunity cost of managing the book
down,quot; Wilkins said in a conference call with analysts to
discuss Barrick's fourth quarter and 2003 results.
A total of 1.5 million ounces quot;is a minimum amount and
could perhaps be higher, depending on what happens in
the gold market,quot; said Wilkins, who was appointed
Barrick's head a year ago after his predecessor was
Asked if Barrick, whose hedge contracts do not have to
be closed out this year, would sell its gold into
lower-priced contracts even if bullion jumped to $500,
quot;We have set a target to manage the book down. But we
will then be benefiting substantially from the higher gold
pricesquot; on unhedged production. About 82 percent of
Barrick's gold reserves in the ground are not hedged.
Wilkins said Barrick had already reduced its hedge book
by 300,000 ounces since Jan. 1, selling the gold at prices
about $50 an ounce below the spot market price.
Barrick reported fourth quarter earnings of $77 million, or
14 cents a share, late on Thursday, up from the $54 million
or 10 cents per share in the same period a year ago.
But Wilkins said if one-off items such as a derivative and
tax gain were stripped out of earnings, the per share figure
would have been 8 cents. This was bang-on analysts'
expectations as polled by Reuters Research.
Barrick said its gold reserves, the amount of gold in the
ground it can mine profitably, dropped to 86 million ounces
at the end of 2003 calculated at a price of $325 per ounce.
This compares with 86.9 million ounces a year ago, when
Barrick calculated reserves using a $300 price. At the less
economic price of $300 an ounce, current reserves would
be 82 million ounces.
Gold miners update their reserve holdings once a year,
adding ounces acquired through exploration or acquisition,
and subtracting those mined out.
Barrick said its cash cost to produce an ounce of gold was
$199 in the December quarter.
Barrick reported fourth quarter production figures last month.
The firm, which has gold mines on five continents, said then
it had produced 1.3 million ounces of gold in the three months,
for a total of 5.51 million ounces in 2003.
In the same release, Barrick said it had reduced its hedge
book by 600,000 ounces to 15.5 million ounces.
The firm repeated its expectation to produce between 4.9
million and 5 million ounces of gold this year at a cash cost
of between $205 and $215 an ounce.
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