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Gold/Mining/Energy : Barrick Gold (ABX)
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To: JH who wrote (3277)1/9/2003 5:29:31 PM
From: russet   of 3558
 
Hi - is there any truth to the assertion from the marketplace that ABX has pretty much capped all of their near-term production of gold at the equivalent of US$270/oz?

No truth to that at all.

Barrick has about 18 million oz gold sold forward at an average price of US$340 per oz. The other 100 million + oz of resource is free to get the spot price when it is produced.

Only 15-30 percent of average annual production (based on 5.5 million Au oz per year production) is hedged, depending on the year, for the next 17 years. As stated above they will get an average of $340 per oz for the hedged portion (1-2 million oz), but the remaining annual production will get the spot (4.5 to 3.5 oz) so if gold remains at the present US$350, Barrick would average about US$347 per oz for 5.5 million oz annual production.

What you call a short, is in effect really a contract that ensures Barrick gets $340 per oz on average for the gold covered by the contract. Trying to lock in a floor or fixed price for a certain portion of revenues or costs is extremely common in all forms of mining, and most forms of business, and is a prudent business policy. Failure to do so has driven many businesses into bankruptcy when temporary drops in revenue due to loss of pricing power cause cashflow crunches. The hedged producer survives, while the unhedged goes bankrupt.
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