Of course inflation of key inputs is a risk,...but presumably that would be reflected in rising interest rates and the POG with time, and would concern all gold producers as well. Barrick's hedging is dynamic and constantly changing. Barrick does allow for some inflation in their forward planning as do all companies. They also spread the risk out by producing in several countries, hedging small amounts equally over many years, and hedging their currency risk.
This currency risk is a double edged sword. Although the U.S.$ is going up, the Rand is rising proportionately. If gold does not rise concurrently in a proportionate manner, SAf gold miners will experience increasing costs against stagnant revenues and perhaps decreasing production (based on recent history) which in time would reverse the disproportionate share price gains SAf based companies have made in the last year over their North American competitors.
Back to the inflation risk..., today Barrick may be leasing a small amount of gold from their bullion bank (Barrick owns their own bullion bank so really deal directly with the central banks) and selling at the current gold price of US$313. They will then buy a bond at current interest rates to match the duration of the gold lease. They spread these leases out over 15 years and only hedge a small percentage of their total expected production in any year as their hedge book shows in their financial statements. They do this on a daily or weekly basis so that the hedge book will eventually change its character to reflect inflation by following the curve of rising interest rates, and rising gold prices too. This is not to say they would not like to stop hedging and reduce their hedgebook during a spike in the POG,...but perhaps they can't at the moment as detailed next.
One poster on another thread pointed out that this years hedge book shows all Barrick's annual production for 2002 is completely hedged at low gold prices, which seems to contradict what I said about only having a small percentage of total production hedged in any year. This I believe reflects the Homestake acquisition. Homestake refused to hedge for many years, and paid the price with poor financial performance. In the last few years when gold bottomed at the lowest prices, Homestake panicked and hedged quite a bit. These very poor bets on the price of gold are coming due now, so Barrick will spend this year cleaning them up and either delivering the gold to the counterparty, or more likely rolling over many of the contracts into new hedges for future delivery and spreading them out over several years. Perhaps this is why they have announced they will hedge half their production this year as this is necessary to spread out the pain that rolling over so many out of money hedges would have had on this years financial statements. This abundance of hedges due thanks to the merger, will certainly limit Barrick's net income for this year should gold continue to climb, but this is not a failure of Barrick's hedging policy as Barrick does not try to bet on the POG, but is only trying to guarantee the price they get for a certain portion of their gold each year, and a good portion of the blame rests with Homestake.
I believe that Barrick is a goldbugs conservative way to play the POG. Barrick is well protected by downward movements in the price of gold, but does not give up increases in profitability and revenue should gold move up and stay at lofty heights. Unlike many producers, Barrick is set up to make money by mining,...not just being a longterm call option on the POG. Barrick shareholders and employees will be cheering just as loudy as all the other gold producers and explorationists should gold continue up to higher values as most of the reserves and resources remain unhedged.
When comparing the different gold producers, it is wise to look at total reserves and resources, hedges, how they hedge, production, costs and plans for the future. It is interesting to see for instance that Newmont, that has significantly higher current annual production compared to Barrick, does not have higher reserves and resources. They also have a similar percentage of hedges in place compared to reserves as Barrick, although many think they are unhedged. The P/E's are similar even though Newmont shareprice recently has outperformed Barrick on a percentage basis. Perhaps Newmont is merely catching up to Barrick in terms of shareprice performance, now that they have better management from Franco Nevada (ggggggggggg)
I also sit in wonderment about this US$ vs gold debate. If you are concerned with a sinking US$, I think you would get a much bigger bang for the buck (gggggggggg) buying contracts on the Euro than you would buying gold and gold miners. Perhaps someone can help me there. Tommaso, aren't you buying Euro contracts to speculate on a dollar slide? How do they compare to the 60% increases in some gold producers over the last year? |
