The only liability they have is to deliver a small percentage of their total gold reserves to their forward sold gold contracts to close them out.
This is the equivalent to preselling homes not yet fully constructed, and the majority of the cost of construction has already been paid by the contractor. The contractor owes the bank nothing. As well the contractor got the full purchase price of the house, and took those proceeds and invested in government bonds collecting interest until the purchaser took ownership. In effect, Barrick settled for a price for their production that guaranteed a good profit. It is a covered short that effectively allows Barrick to lock in a base price for a small portion of their production. 80% of future production is free to get the market price.
The contracts cannot be called unless their coverage ratio of reserves to total hedged gold, or annual production to hedged gold deliverable, or certain profitability or balance sheet numbers fall below certain levels, and none of these coverage ratios have anything to do with their hedges. Given that the current coverage of these convenants is multiples of the levels that would be required to cause these contracts to be called, there is little likelihood of this happening. If costs rose high enough, and revenues dropped low enough to cause this, most gold producers would have been turned to toast long before Barrick.
Mark to market in Barrick's case, is a bullchit liability number that some ANALysts use to prove their ignorance of Barrick's hedging program.
Barrick's announcement last week only states they will not add further hedges. It does not say what they will do to existing ones which will mature in roughly equal amounts per year over the next decade. They will likely deliver production into the hedges as they come due so the concept of a monetary liability is rather stupid given they have not recorded the revenue from the forward sold hedges, nor booked a profit from production of that same gold. The liability is a fake accounting number required by the accounting authorities because Barrick has forward sold contracts, but mark to market has no impact on cashflow per oz of production, or profit booked per oz of production. The liability will magically disappear on the financial statements as the hedges are closed out. |
