When Barrick Gold announced plans in early September to eliminate a contentious hedging program, the world's biggest gold miner gave itself up to a year to shut down a massive derivative position.
As of Tuesday, that hedged exposure is gone, a swift shift in strategy at Barrick that's bullish for the precious metal.
Barrick used $5.1-billion (U.S.) raised in stock and bond sales to shut down its hedge book well ahead of schedule. The biggest issue for the company was three million ounces of hedge production that offered the company no exposure to a rising bullion price, and BMO Nesbitt Burns estimated in a research report that this millstone was shut down at an average cost of $1,070 an ounce.
"The company stated that its positive view on the gold price led to the acceleration of the contract elimination," said BMO Nesbitt Burns analyst David Haughton in a report. "The hedge book had long been a concern with investors and its elimination positions the company to fully benefit from development of its next generation of large-scale, lower-cost mines."
Mr. Haughton has an "outperform" rating on Barrick, with a $52.50 (U.S.) target price on the stock. Executives at rival mining companies, who stressed that they were speculating about what was happening in the boardroom, estimated that Barrick had a medium-term target price on gold of $1,300 an ounce or more when management decided to shut down the hedge book. Gold has been rallying steadily since Barrick made its move in September.
Barrick faces a further $300-million accounting charge as it exits these final contracts, a hit that reflects mark-to-market losses on its hedge book since the end of the last quarter, according to BMO Nesbitt Burns.