Barrick Contango,...
My understanding is the term of the bonds is matched to the term of the gold lease. They hold both to maturity so are not exposed to interest rate change risk. They have a locked in contango. They can get long term gold lease contracts which most other producers can not get because of their excellent balance sheet.
Don't forget that the 18 million oz of leased gold contracts come due in small increments over 15 years. They don't come close to exceeding their production in any year. Also keep in mind that Barrick sells at many times over the year. So if a gold spike occurs, they will sell some before the gold spike, and some after. If gold spikes to US$1000, Barrick will lease the gold and sell it at that US$1000 price, and lock in a contango at the same time if the prevailing lease rates are lower than the Triple A bonds.
Also don't forget that unlike Ashanti, all Barricks hedging amount to covered calls. They have enough gold production in any year to cover all the calls and leases should they need too.
Barrick's is a conservative hedging strategy that seeks to lock in the revenue on each ounce of gold produced. They adjust their hedges to market conditions. This year their hedges may consume all of their production (if they don't roll over leases coming due), but that is only because of the hedges they acquired from Homestake who I believe had a considerable number of min-max contracts and had wrote covered calls. This is a one year possibility as future years have much reduced calls and higher strike prices.
I am not recommending Barrick as the best gold investment in the short term. Certainly over the last 20 years, they have been one of the best gold investments (try charting ABX since inception against any other gold company). I'm only defending their use of hedging as a conservative management policy because it locks in the price they receive for the oz Au, Ag produced. They also hedge currency risk to some extent.
Barricks high P/E relative to the other miners a year ago stopped Barrick from appreciating as fast as the lower P/E majors until the others catch up. When the P/E's are comparable, it will be interesting to see if the market gives the unhedged a significant premium over the hedged if the price of gold stabilizes in this range. No doubt if gold spikes, Barrick may suffer until they tell the market they are unwinding their hedges and buying call options,...then they become like all the others. They did this about a year or two ago when the gold price spiked and got a good share price boost out of the announcement.
Note that Newmont's hedge position was near 18 million oz Au after they took over Normandy. This is detailed in their press releases and financial reports at the time of takeover. They are not so unhedged as some may think.
Finally, no one can predict the future price of gold with accuracy and reproducibility. As a producer you can lock in the price you will receive for your Au oz by hedging. This is a prudent thing to do if you are expanding, building new mines, acquiring competitors etc., because it ensures that you can predict your cashflows in the future. Those that don't hedge, speculate on the POG. Is speculation what you really want your management to do?,...is that not what Enron did with commodities which may have contributed greatly to the need for all the financial statement shenanigans that followed? |
