Barrick work new hedge message hard, but uncomfortably
By: Ken Gooding
Posted: 2003/12/03 Wed 18:48 EST | � Mineweb 1997-2003
LONDON -- Greg Wilkins, chief executive of Barrick Gold, was asked today (December 3) if his company would make another u-turn over gold hedging if investor sentiment changed and was more favourably disposed towards the practice. After all, it was the company�s commitment to shareholder value that had caused the recent about-face.
Wilkins was in London for the Mining Journal World Congress and gave a presentation during which he made it very clear it was investor antipathy to hedging � and towards derivatives of all types � that had forced Barrick to announce it was stopping the practice that had served it so well over many years.
It was Wilkins, then Barrick�s chief financial officer, who in the 1980s supervised the setting up of the company�s hedging programmes and it was obvious he still believed they had much to offer. But �it is impossible for me to explain to all our individual investors the merits of the programme.�
He looked uncomfortable when asked about the possibility of another u-turn on hedging if sentiment changed. �I can�t foresee that, investors at large would rather manage their own gold price exposure,� he said. Then he admitted: �But we would have to think about it.�
At present, following the Enron and other Wall Street scandals, investors were very wary of anything to do with derivatives and were distrustful of managements, Wilkins said. He produced a chart showing a price to net asset value analysis, with Barrick trailing its competitors with an average of 2.44 times against 2.83 times for Placer Dome and 3.76 times for Newmont Mining.
Wilkins said he was determined to close that gap.
He spent relatively little time on the subject but other Barrick representatives handed out a paper containing �general questions and answers on no-hedge policy.�
One of the questions posed was: If the gold price goes to $500 an ounce, are you saying you will not sell forward any gold? Answer: Yes. We are committed to shareholder value and want to eliminate the discount that the market ascribes to hedging.
The answer to a question about why Barrick is giving up hedging when it �works so well,� is: Clearly hedging has significantly contributed to our financial strength and the industry�s only A credit rating balance sheet. The primary reason for the decision to discontinue hedging is our overriding commitment to shareholder value.
Investor sentiment has shifted in the last few years. The stock market now ascribes a discount to companies that hedge and this is reflected in the share price. Since our commitment to shareholder value is paramount, we want to ensure that our shareholders benefit most and therefore we will eliminate the discount by eliminating the practice of hedging.
Question: So why not eliminate the hedge book right away?
Answer: The company is evaluating a range of alternatives in order to reduce the hedge book down to zero over time in a prudent, planned fashion. We have unique flexibility in the terms of our forward sales commitments and we don�t want to spend a significant amount of hard earned shareholders money on imprudent decisions. We will reduce our hedge book in a timely way, using market volatility and taking advantage of opportunities as they present themselves.
The Q& A goes on to say there is no timetable to bring the hedge book down from the present 16m ounces to zero. It says that, in the light of the cyclicality in the gold market and Barrick�s production level of a minimum of 5m ounces a year, it expects there will be opportunities to deliver its gold production against forward sales commitments. In addition, it is evaluating other alternatives to reduce the level in the short term.
Yes I did buy some abx near the bottom of the cycle just over three years ago. I sold it after 9/11. I certainly could not complain. Nortel has done poorly in the last couple years. Just hold longer.
Buying gold in the 1990's was not a good idea because there was no investment demand for it. There is no investment demand for tech stocks at the levels of years past, but you could argue that the long-term investor can wait for the next big bull market.
Base metals are cyclical in their nature, so it always makes sense to buy the bottom the cycle and ride up. Gold finished its down cycle a couple of years ago.
We'll never agree on Murphy or GATA, so why bother?
Thanks for the names you mentioned, I'll do some DD and let you know what decisions, if any, I make. If you have other thoughts on potential investment prospects, they are always welcome.
What is your point of buying a falling knife? To go broke?
Modern Portfolio Theory says you should buy when you have the money (so you got that part right) but to diversify. So gold should be 5% of your portfolio, not more, for example.
I hedge almost every day using stock in combination with options. So, I do not have, nor have I ever had, a problem with hedging, per se.
The problem I had with ABX was that they got too heavily hedged, and failed to adjust those hedges in a timely manner when the gold market turned bullish a couple of years ago. They did it again with silver just recently, despite my urgent vocal and written warnings, and as far as I know they still haven't covered, although I'd love to hear that I'm wrong.
What I would consider normal trading discipline and risk controls were missing because of a "can't lose" psychology, "we're not trading", "you can't predict it", etc. I call it rationalization. You can certainly forecast the past! If you're losing on your hedges, get smaller. Simple.
I posted a recommendation on this board for them to cover if gold broke $300, or if silver took out $5. It can be done. I did it...on this board.
Rightly or wrongly, even though they have lots of unhedged gold in the mines, they appeared to some to be permabears. Hence, they became the focus of conspiracy theorists, who blamed them for gold prices, which I think is totally misguided.
All said, I like what I'm hearing now, but I wish the CEO seemed to understand that some investors are anti-hedging, but others are just anti-anything that produces opportunity costs,losses, notional or otherwise, or otherwise smacks of inflexibility or obtuseness in a rapidly changing environment.
All just my opinions.
My one complaint is that they are being obtuse about what their plan is to reduce the hedgebook to 0 and how they will achieve this.
Obviously, if they planned to buy back the book, it would make no sense to announce it, as this would drive the price even higher. They might write various call options to offset the hedges, or deliver a % of the production against the hedge book (this is my preffered option) each year, or buy back a monthly amount, say 50,000 oz.
One option would be to close those contracts still in the money (the 318 is the aggregate average, there are some contracts at 270 and some at 370, I'm sure, but there is no detail on the %) and keep the out of the money ones, so that they do reduce it, but that would not work to get it to zero.
This lack of information regarding their plans to get to zero does grate on my nerves somewhat.
<<My one complaint is that they are being obtuse about what their plan is to reduce the hedgebook to 0 and how they will achieve this.>>
Oddly enough, this does not bother me at all.
The only thing that bothers me is the apparent ambivalence, which I attribute to an attachment, perhaps the fear of being wrong, a bane of many traders.
No matter how you look at it, Barrick�s stunning reversal of their hedging policy last Friday is very bullish for the reasons discussed in Friday�s MIDAS. The buzz in the gold world is about what happened to Barrick between Thursday and Friday? There is only one explanation in my book. It has to have something to do with the Blanchard & Co. case. What we know:
*Barrick�s Peter Munk unexpectedly announced a change in Barrick�s hedging policy from one day to the next, coming across like a chairman who either can�t make up his mind, or was suddenly TOLD what to say.
*CEO Wilkins was supposed to speak in London, but left for New Orleans on "urgent business" according to MineWeb. New Orleans Federal District Court is where the gold manipulation court case has gone into the Discovery phase.
*I have been told Barrick has learned of the expert witnesses who will be called to testify against them and they were stunned. I have also been informed there is discussion about some damning emails. This is only conjecture as I received this information second-hand, but it comes from a good source and it all fits. You don�t tell the world how great hedging is one day and then do a complete about face the next day without a compelling reason.
*One of the objectives of the Blanchard case is to seek immediate injunctive relief from Barrick, which is a demand they lift their hedges. Perhaps Barrick and Blanchard are working on a settlement, with one of the stipulations being an immediate cessation of hedging.
*Barrick extolled hedging at $300, but is giving it up at $400, not just now but for the next 10 years. Very strange to say the least. Something has to be wrong.
*Barrick is cutting all non-essential spending world-wide. That screams cash flow pinch. What�s causing the cash crunch? Could scared bankers be cutting their credit lines? A fellow Caf� member might have an explanation:
The following is taken from Barrick's website:
"Our trading agreements with our counterparties do provide for early close out of certain transactions in the event of a material negative change in our ability to produce gold for delivery under our hedging agreements, or a lack of gold market, and for customary events of default such as covenant breaches, insolvency or bankruptcy. The significant financial covenants are:
Barrick must maintain a minimum consolidated net worth of at least US$2 billion �" currently, it is US$3.4 billion.
Barrick must maintain a maximum long-term debt to consolidated net worth ratio of 1.5:1 �" currently, it is under 0.25:1. " END
Bill, this means that if everything remained the same since June 30 except the gold price increase the current net worth of Barrick is 2.6 Billion. This means delivering of gold could be triggered at POG=$432.
Now what about if there is talk of a settlement out of court in the Blanchard case of say $600 million this would take net worth of Barrick IMMEDIATELY below 2 billion dollars and trigger gold re-payment.
They are on the brink. Hence the announcement. The strange thing is that they must have known the announcement would also drive up the POG and therefore push them closer to the brink, which is very odd. Does this mean they are holding some gold options?
One thing is for sure the smoke is billowing out of this one!
Bill Murphy speaks pure horse
Anglogold always had a bigger hedgebook than ABX, but because they gave in to Murphy's extortion demands and paid him off, they get a free pass. ABX is too smart with deal with a convicted fraud artist.
In case you didn't see it already, FCX's HQ is in New Orleans as well.