Slamming Barrick? I didn't think you were, but it wouldn't matter to me. Remember 80%+ of oral communication is not the words, but body language and tone, making this forum a poor way of communicating ideas unless one is willing to write a book on each issue. In 15 minutes, face to face, reviewing Barricks last full financial report we could easily flush out all the ways Barrick has hedged costs and revenues and minimized risk.
You can't separate the forward selling of gold from the rest of the hedges and operating plans Barrick has put in place. It's a complex business plan to handle most risks the world can throw at them. Forward selling is one component, and Barrick officials would tell you it is a small and diminishing one at this time as they too are bullish on the POG,...something they weren't when a good portion of those hedges were put on (remember massive unregulated Central Bank selling nearly a decade ago?).
I think current G10 governments are acutely aware of the problems of past inflationary policies. While individual countries may institute these policies again, I doubt a major power would for more than a few years. Then they would act to rein it in, so I would question whether the 1930's analogy is relevant to Barrick for the next 2 decades. Anything is possible, but what is most probable over the next few years? The Fed is continuing to raise interest rates. This will eventually cut back consumption and lower pressures on prices.
We can talk about extreme possibilities, but such possibilities would bring Barrick opportunities along with the potential hardships. If inflation goes up, and the POG rises directly with it, Barrick can use its reserve base as collateral for loans as well as using its increasing stock price to fund buyouts of its competitors, thus increasing its ratio of hedged to unhedged reserves to even lower levels and further diminishing any risk that may be associated with forward sold ozs.
Another element of forward selling, Barrick style. Every year the value of the bond portfolio rises, therefore the price per hedged oz eventually received when delivered to the contract will rise along with it. Do a ten year compound interest calculation on a Billion dollars at 6%. One billion becomes near 1.7 billion. So if they were getting $350 per oz 2 years ago, in 2013 they will get $350 * 1.7 = $595 per oz if delivered to the hedge. If interest rates go up to fight inflation Barrick gets more because most of the bond interest rates are floating. In the mean time they have many of their costs hedged or diversified geographically and politically so revenues increase and costs remain nearly the same.
I believe Barrick has dropped their total hedged oz by close to 40%+ over the last few years. They are not opening new contracts. My guess is the risks of what remains hurting Barrick in any serious way is negligible, hence my risk free quote. |
