Barrick hedges on gold prices, Placer bets on them
Reuters Story - February 04, 2000 18:39
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By Scott Anderson
TORONTO, Feb 4 (Reuters) - Barrick Gold Corp. , North America's second-largest gold miner, notched up another year of record profits on Friday, crediting in part an innovative hedging program.
Meanwhile, Placer Dome Inc. , North America's third-largest gold miner, said on Friday it was suspending its hedge program and urged the rest of the industry to do the same.
Placer said it suspended the program in expectation of improving gold prices and issued a challenge to other producers to rethink their hedging stances as well.
"We believe that gold prices will move higher. The agreement by European central banks to limit their sales and lending was an important first step towards improving gold market sentiment, but industry needs to do its part," Placer President Jay Taylor said in a release.
"As of this day, the company has ceased adding any new hedge positions."
Hedging allows a company to guard against a fall in gold prices by selling future production at a fixed price. It can pay handsome dividends in an environment where confidence in gold is declining, but it can backfire when bullion prices rise.
The price of gold has traded in wild gyrations in the past year, soaring to a high of $326.25 an ounce and a low of $252.80.
On the COMEX division of the New York Mercantile Exchange, gold for April delivery rose $23.10, or almost 8 percent, to $313 an ounce on Friday. During the day it rose as high as $318.50, its highest level since October 18.
Barrick has been generally unaffected by the fluctuating gold price as it maintains an aggressive gold hedging program. Last year its hedge position added $391 million, at a realized cash price of $385 an ounce.
Placer's program allowed it to realize an average $480 per ounce on its gold forward sales during 1999. The average price realized on all of the company's gold production was $341 per ounce, or $62 per once over the spot price.
It is estimated that Barrick has hedged, or forward sold, 13 million ounces of gold at an average price of $385 an ounce through to 2001.
"The downside protection that our premium gold sales program has given our shareholders has been of great benefit to us in the past and it has generated the financial strength that we're enjoying today," said Barrick spokesman Vincent Borg.
While Borg refused to unveil Barrick's plans for its hedging program before a financial presentation on Monday, analysts doubted the gold miner would deviate from a practice that has served it so well.
"Certainly they are protected for the next couple of years, almost fully. So even if they did decide today that they were not going to add any more hedge positions, they are probably not in the position to do anything for the next couple of years anyway," said David Davidson, an analyst at Newcrest Capital, in Toronto.
"If they wanted to they could jump on the bandwagon and certainly not cause any harm. The train is just leaving the station with Placer."
Barrick said on Friday it earned $81 million, or 20 cents a share in its fourth quarter, compared with earnings of $83 million, or $0.21 a share, for the same period a year ago.
This was one cent short of expectations among analysts, who were forecasting 21 cents according to polling firm First Call/Thomson Financial.
For the full year, Barrick's net income was a record $331 million, or 83 cents a share, compared with $301 million, or 79 cents, in 1998.
($1=$1.44 Canadian)
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