Tuesday, September 8, 2009

American Barrick (ABX) Is Doing What? Did I Read That Correctly?

American Barrick, one of the world's largest mining companies, announced today that they will issue stock to raise $3 billion in order to entirely eliminate their very infamous gold hedge contracts.  These hedges were put in place several years ago when gold was around $300 per ounce.  Here's the news link:

This Tells Us Gold Is Not Going Lower

This is an extraordinary move considering that Barrick is using $3 billion in cold, hard shareholder cash and is taking a total charge of $5.6 billion, in what amounts to public admission of the Company's failure to anticipate the ongoing bull market in gold and silver.   If Wells Fargo were to address its $122 billion pay-option-ARM portfolio in this manner (let's assume it's worth 50 cents on the dollar, which is probably generous), they would announce a $61 billion write-down, to be immediately funded with a $32 billion stock issue.  I guess if you're a big bank, it's just easier to ignore the loss, take $30 billion from the taxpayer, pay out several billion in bonuses and announce on CNBC that "it's all good."

What's even more extraordinary about this move is the implied message that Barrick is sending to the world about where they think the price of gold is headed.  They wouldn't be spending $3 billion in shareholder capital upfront to get rid of these hedges if they thought the gold bull market was over and the price was about to fall.  This move by Barrick is a signal to the world that they believe the price of gold is going much higher in price and they are willing to spend several billion in order to reap to full benefits of much higher gold prices in the future.

For anyone doubting the legitimacy of the gold bull, would you rather place your faith in the idiots on CNBC or in the smoke signals being sent globally by one of the world's largest gold miners?


  1. Dave what the hell is Barrick doing in the HUI if it is hedged ??
    Am I missing something ?

  2. Josh, good question. At least ABX is eliminating their hedges. Several other HUI stocks hedge: AU, CDE, and AUY for sure. I suspect BVN probably has some hedges going as well. AU is systematically getting rid of its hedges, CDE I don't know what they're doing and I just found out AUY had hedges on, but I think it might be on their copper.