Barrick Gold’s Disastrous Stretch as Commodity Trader

Barrick Gold (ABX) has made a number of bold moves in the past year in order to take advantage of all time high gold prices. In early September, as gold was crossing the $1000 per ounce level, Barrick Gold announced that it would issue a secondary offering in order to raise capital and buy themselves out of some bad hedging bets from prior years (Barrick’s Secondary Offering to Buy Them Out of Bad Hedging). It was clear that they had hedged their industry leading production to a price level that was far below the current market value. It was at that point that they developed a plan to undergo the expensive processes of buying out their hedges.

The price continued to climb after the announcement by nearly 20% over the next three months. In December, Barrick’s hand was forced as every gain in gold prices made their hedges more expensive to buy out. They had planned to phase out of their hedges over a period of 12 months, but on December 1st, with the price of gold above $1200, they simply could not wait any longer and risk further liability from rising prices (Barrick Gold Races Out of Hedges). The company paid $5.1 billion to neutralize their horrendous hedging decisions and 80% of their floating contracts as well, and the average price per ounce was $1070.

Well, the announcement of paying off their hedging came just about at the top of gold’s run, and since the beginning of December gold prices have fallen about 10%. ABX stock which is clearly affected by the price of gold has fallen by 16% in that period (even though it was up 5% on Friday). With that said, the company is still getting much more benefit out of each ounce of gold it produces, and it is growing production rapidly. Barrick has estimated it produced about 7.2 to 7.6 million ounces in 2009 at a cost of about $450 to $475 per. They anticipate growing production by nearly 7% in 2010 as well.

At Ockham, we have a Fairly Valued rating on ABX as of this week’s report, and will likely maintain that rating in the upcoming report. We will get a better idea of their production and financial position when they report earnings on Febuary 18th, but it is clear that they should focus on growing production and lowering costs because their past performance as a “commodity trader” have been horrendous. You would expect no one has a better grip on gold prices than the world’s largest producer, but apparently not in this case.

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