Declining Gold, Increasing Costs: Barrick May Begin to Hedge

by on December 5, 2013 5:43 pm GMT

The steep decline of gold and the increasing of operating costs are the prime factors on whether Barrick Gold Crop. (ABX) will begin to do what it has not in nearly four years, hedge gold bullion prices. The well-known miner, largest global gold producer, has been hit hard with its stock price nearly cleaved in half this year; and the new chairman, John Thornton, believes it’s worth considering.

Thornton found it odd that Barrick did not continue to hedge gold. “As an outsider, I always thought it made great sense to hedge… I can’t understand for the life of me why that wouldn’t be an active topic that you would be carefully following at all times,” he said at a Toronto conference. In 2009, Barrick spent $5.6 billion to get out of fixed-price contracts as it bet on continuing price increases. Goes to show, nothing is a sure thing.

The mining industry began to phase out of hedging practices as gold continued to increase and were locked into lower prices. However, gold has declined 26 percent this year, and gold’s future price is unknown. John Goldsmith, fund-manager at Montrusco Bolton Investment Inc., said “the smart companies are going to be the ones that use put options or enter into forward contracts for a portion of their current year’s production to guarantee that production, to guarantee that cash flow.”

The decline this year caused $8.7 billion in writedowns and the suspension of a costly Pascua-Lama mine in South America.

The primary concern for Barrick, and other miners, is to reign in costs and increase cash flow. Thornton, a former Goldman Sachs exec., is already looking into mineral projects through his Chinese connections. The new chairman does not want to just be known for gold but a leading mineral producer globally.

And Barrick hit the price target of $15.39 initiated on November 2.