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Game over: Barrick dilutes by $3 billion to buy back gold hedges
Barrick to Sell $3 Billion in Stock to Buy Back Hedges
By Cameron French
Tuesday, September 8, 2009
TORONTO -- Barrick Gold, the world's biggest gold producer, said on Tuesday it will issue $3 billion in stock and use the proceeds to buy back all of its fixed-price gold hedges and a portion of its floating hedges.
Barrick will take a $5.6 billion charge on its third-quarter earnings as a result of the move.
During times of weak prices, gold miners often sell a portion of their future production to protect, or hedge, against the possibility that prices will fall.
When prices rise, as they have done since 2001, the company suffers because value of the future production they've sold does not increase with the gold price.
"The gold hedge book has been a particular concern among our shareholders and the broader market, which we believe has obscured the many positive developments within the company," Barrick Chief Executive Aaron Regent said in a statement.
Barrick stopped hedging, or forward-selling, its gold in 2003.
It exited its production hedge book two years ago, and the company has faced repeated questions from analysts and shareholders since then about its plans for the remaining 9.5 million ounces it had hedged to finance projects.
The equity deal comes as a resurgent gold price and healing credit markets have prompted investors to snap up gold stocks, bullion and equity.
The metal's price hovered just below $1,000 an ounce on Tuesday.
Barrick will issue 81.2 million shares at $36.95 a share, a 6 percent discount to the stock's New York closing price of $39.30 on Tuesday.
The company will use $1.9 billion of the proceeds to eliminate all of its fixed-price gold contracts -- on which the company effectively lost money every time the gold price rose -- by purchasing gold on the open market and delivering it into the contracts.
It will use about $1 billion to eliminate some of its floating spot price contracts.
After the deal, Barrick will still hold floating hedges with a negative mark-to-market value of $2.7 billion, but the $5.6 billion charge will remove it from the balance sheet.
Bill O'Neill, a partner at LOGIC Advisors in Upper Saddle River, New Jersey, said the deal would not likely have a material impact on the gold market.
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