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Gold rush

11 September 2009 By Robert Cyran

Should gold mining companies hedge their output? With a newish chief executive, Aaron Regent, Barrick Gold has decided the expensive answer is no. A big reason is that the metal s buoyant price north of $1,000 an ounce has gold bugs clamouring for exposure. Yet investors could get nostalgic for hedging protection next time prices weaken.

Barrick this week sold $4bn of shares, more than 10% of its market capitalisation, to fund the unwinding of hedges. That s an expensive bit of housekeeping, not to mention a big shift for the company, but investors still lapped the shares up knowing that their outlay would be rewarded with a share price much more highly leveraged to gold and therefore with much greater potential for gains should its price continue soaring.

Investors weren t always so eager, though. Barrick s hedging made it a relative darling in the sector when gold prices were low. At such times, operational efficiency comes to the fore and companies like to lock in prices lest they fall below costs. There s also a tendency for miners to diversify into other metals, too.

Soaring gold prices have put an end to that. Investors suddenly want pure gold exposure and simple financial statements. Barrick, for example, just sold chunks of its South American silver production to a specialist producer of that other shiny metal. And it s not alone in wanting to cut down on hedging AngloGold Ashanti has also set about doing so.

Whether this shift is the right thing at the right time remains uncertain. The gold price could yet rise sharply the metal is a traditional inflation hedge and a comfort for uncertain investors. Yet the rally could also easily run out of steam. A cynic might even see Barrick’s move as indicative of prices being toppy.

The gold bugs current enthusiasm helped Barrick raise a lot of cash with only a minor negative impact on its share price. The company seized the moment, but after hedging for so many years it must have thought long and hard before changing tack. Even so, the next downturn in the yellow metal is likely to test its bosses’ conviction.

 

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