Tuesday, October 13, 2009

American Barrick Issues $1.25 Billion In Debt To Further Reduce Gold Hedge

With the ink barely dry on its $4 billion stock deal, American Barrick (ABX) announced a surprise debt deal to raise another $1.25 billion in order to further reduce its gold hedge book.  The stock deal was used to extinguish Barrick's $3 billion fixed-price hedges plus some of its floating-price hedge exposure, incurring 10% shareholder equity dilution and a $5.6 billion charge to earnings. 

The bond deal announced tonight, curiously several hours after the stock market had closed for the day, will be used to eliminate part of the $2.7 billion in floating-rate hedges that remained after last month's mammoth stock deal. 

The nature of this latest financing tells me two things.  First, there is inexorable demand from big institutional investors for large, liquid precious metals mining company financing deals.  It's one thing for the world's largest gold mining company to issue a $4 billion stock deal, but it's an entirely different matter for the same company to issue a large unsecured bond deal, with 1/3 of the deal maturing in 10 years and 2/3 of the deal maturing in 30 years.  That tells me that big investors are now comfortable with the idea that the gold bull market will have longevity.

The second, the fact that Barrick is doing this large debt deal so soon after the stock deal in order to cut its remaining floating-rate hedge exposure in half sends a signal to the market that Barrick's management is concerned about the Company's large negative exposure to a big upside move in the price of gold.  When you think about it, if Barrick managment thought that the price of gold were just as likely to go down as it would be to go up, it would be in the Company's best interest to wait a bit and try and buy back its hedge at lower prices.  Raising more money like this, however, tells us that Barrick management sees the probability of an imminent and big move in the price of gold as being significantly skewed to the upside.

I hate to burst the egos of gold market analytic geniuses like Jon Nadler, Jeffrey Christian and Robert Prechter (note: sarcasm intended) - all three of whom believe the gold market has topped and likely to crash - but as a betting man I like the odds of placing my chips on the view of the people running the world's largest gold mining company rather than three stooges who provide useless investment advice and don't invest a nickel of their own money in the markets.

Please note, my endorsement of the outlook on gold's upside prospects by Barrick's management in no way reflects any interest on my part to invest in Barrick's stock.  I still believe Barrick is a mediocre investment for many reasons.  HOWEVER, we know from previous statements from management that Barrick is actively looking for acquisitions and has a subsidiary operation set up to monitor and evaluate junior mining companies.  I am confident that there is a lot of money to be made building a portfolio of junior mining stocks ahead of the inevitable rush of huge money flows into the exploration segment of the mining stock sector.

Ultimately, based on actions being taken by Barrick, we can be highly confident that 1) the price of gold is going a lot higher;  2)  there is substantial, and substantially growing, institutional investor demand for mining company assets; and 3)  there is still a lot of money to be made from investing in the precious metals and mining stock sector.


  1. WoW. This is big.

    In other news, the ECB sold $2mln gold to an unknown buyers. I guess we all know where that gold went, don't we? Remember the talk about the London Gold delivery failure? Seems like it has been resolved.

  2. Barrick was completely wrong (on their forecast of the gold price) when they put on their hedges, so why would you assume they are going to be right about the price movement this time?

    If you would have "placed your chips on the view of the people running the world's largest gold mining company" 20 years ago, you would have been wiped out.

  3. Because Barrick is probably copying every other large major gold mining company. I am sure this idea to buy back the hedges was not entirely their own. Their executives were probably told this a thousand times or so at the Denver Gold Forum by all kinds of people...

  4. to the naysayers please explain how the price will go down with declining production going forward. Mining CEO's of more than one company have said it will take 1,500/oz to make it worthwhile to lease land, explore, develop, and then produce from a new mine. Before figuring in greed/fear, money printing, etc... you have the simple supply/demand situation, which will not be fixed any time soon unless gold rises quite a bit from current levels.