TORONTO Dec 5 Barrick Gold Corp
investors have taken in stride news that the world's largest
gold producer may consider hedging its gold exposure, but they
are roundly panning its plan for more diversification into other
John Thornton, who was confirmed after markets closed on
Wednesday as Barrick's next chairman, told reporters he would
consider revisiting a hedging strategy for selling the company's
output because of the volatility of gold prices.
He also said he thinks Barrick, which already has a copper
sideline, is well placed to look more at copper and perhaps at
other commodities, once it puts its recent troubles behind it.
That pronouncement stung some Barrick shareholders, many of
whom are invested in the Toronto-based miner only because they
see a bright future for the gold price.
"It's like saying to the market, once I recover from all the
bad decisions I have made and paid back the mountains of debt I
incurred doing it, I am going to go out and do it all over
again, but not in the commodity I'm in right now," said John
O'Connell, the head of wealth management firm Davis Rea Ltd.
Barrick's share price is stuck near 21-year lows, hurt by a
drop in the price of gold and investor disappointment with
governance and corporate missteps that include ballooning costs
at its now mothballed Pascua-Lama gold project in the South
American Andes and its pricey takeover of Africa-focused copper
miner Equinox in 2011.
"We are distinctly positioned over the next decade or two,
if we can execute, to take what's been built and not only extend
it as the world's leading gold miner, but also to take a very
serious look at copper, which we are in and possibly minerals
beyond that too," Thornton said on Wednesday after Barrick
announced a major boardroom shuffle.
Thornton's vision dovetails with that of Barrick's founder
and long-time chairman, Peter Munk, who has faced bitter
criticism for the C$7.3 billion ($6.9 billion) Equinox deal and
Munk has long harbored an ambition to see Barrick become a
big diversified miner in the mold of Rio Tinto Ltd or
BHP Billiton Ltd.
Barrick said on Wednesday that Munk, 86, and two other
long-term directors, will step down from the board this spring,
when Thornton will take over as chairman. Barrick also nominated
four new independent directors.
Thornton's remarks on diversification struck a sour note
with Christopher Mancini, an analyst at the Gabelli Gold Fund,
which owns about 2.86 million Barrick shares.
"The comments overall are disconcerting," he said. "I would
say that Barrick has too many mines already. The company needs
to get smaller and less complex, not more so."
Barrick declined to comment. Its shares fell 2 percent to
C$16.39 on the Toronto Stock Exchange on Thursday as the price
of gold slipped.
SPLIT ON HEDGING
Investors and analysts are split on hedging, which was
popular in the 1990s, when prices were weak, but became taboo in
the last decade as gold prices soared.
Gold companies typically hedge, or agree to sell gold at a
future date at a fixed price, to help finance projects, or to
protect against falling bullion prices. Back in 2009, however,
Barrick paid a fortune to unwind its hedge book because it was
losing potential revenue as the gold price rose.
Barrick issued equity and debt worth more than $5 billion to
eliminate the gold hedges and booked more than $5 billion in
Thornton said on Wednesday he would look seriously at
hedging, given the sharp pullback in the price of gold. Spot
gold is some 36 percent below its 2011 peak above $1,900 an
ounce, and was at around $1,225 on Thursday.
"It seems that Mr. Thornton doesn't quite understand that
the fundamental issue with hedging is that a company fixes its
revenue in an industry where the cost base is extremely variable
and largely unhedgeable," said Mancini, noting that his firm is
invested in Barrick for its exposure to gold.
Others disagree. Barclays debt analyst Harry Mateer said he
is encouraged that Barrick appears to be considering a hedging
"We consider hedging to be a prudent financial strategy for
at least a portion of a company's production," Mateer said in a
note to clients.
"Given the proliferation of exchange-traded products that
allow investors to have exposure to gold, we no longer think
that gold equity investors are seeking full exposure to the
underlying commodity price."
John Goldsmith, deputy head of equities at Montrusco Bolton
Investments - which sold its entire position in Barrick after
the Equinox deal - declined to say whether he would buy back
into the stock if Barrick hedged. But he noted that the strategy
has worked well for the oil and gas industry.
"Oil and gas companies do not take all their reserves and
hedge all of their reserves into the future ad infinitum, they
hedge a portion of this year's production to guarantee a certain
amount of cash flow for next year's production program," he said
He said Barrick's previous hedging strategy backfired
because the company hedged production for years in the future.
"I think the strategy makes a boatload of sense," he said.