It seems like a dream trade.
Barrick Gold is obligated to sell you gold for $375 (U.S.) an ounce. You can sell that gold in the open market for $1,000 an ounce. For the banks and other institutions that struck derivative deals with the world's largest gold mining company, Barrick's decision to retire its 9.5-million-ounce hedged gold position sounds like a lottery-sized win.
Like most events in the derivative world, it's not that simple.
Yes, Barrick is getting rid of its hedge contracts. The company's 17 counterparties, and we'll list many of them in a moment, do stand to book gains.
But think about the way these contracts work. Many of these hedges are meant to be in place for years. Royal Bank of Canada, which is on the other side of some of those Barrick contracts, didn't make a long-term, one-way bet on gold when it guaranteed a price to Barrick. The bank simply used the derivative market to create a position that offset its bullion exposure, and took a fee for its services. In other words, counterparties hedged the hedges they struck with Barrick.
So as Barrick slashes its hedges over the next year, and takes a $5.6-billion charge, the mining company's counterparties will not book similar-sized gains. They will simply wind down their own bullion hedges. In the extremely liquid gold futures market, this should play out quietly and with minimal market impact.
Barrick listed a number of its hedging counterparties because they are also the investment banks underwriting its $4-billion stock sale. The move is meant to make any potential conflict clear to investors. For the same reason, the gold company also listed lenders involved in the equity financing.
However, Barrick and the dealers said being a counterparty or a creditor didn't win an investment house a role in this financing, which will likely pay the Street $140-million in fees. The Barrick prospectus says: "The decision to distribute the common shares, including the determination of the terms of the offering, was made through negotiations between Barrick and the underwriters. Neither the lender affiliates nor the counterparties had any involvement in such decision or determination."
Barrick said the hedging counterparties that also had a role in the stock sale include the four lead underwriters: RBC Dominion Securities (a unit of Royal Bank of Canada); Morgan Stanley; J.P. Morgan and Scotia Capital. The mining company also hedged its gold production with BNP Paribas, Citigroup, Goldman Sachs, UBS Securities and Barclays Capital.
DEAL OR NO DEAL?
Call it the deal that never was, as Artis REIT halted trading late Wednesday for what sources say was to be an equity offering, only to resume trading without making any announcement.
With investors showing enormous interest in income-spinning firms such as REITs, investment banking sources say Artis was considering a bought deal financing led by investment bank Macquarie Group.
The real estate company asked regulators to stop trading in its units on the Toronto Stock Exchange an hour before the end of Wednesday's session, as news was "pending."
Just over two hours later, the firm asked that trading resume, and explained that it "requested the trading halt in anticipation of making a material announcement, however, as at the time of the issuance of this press release, there is no information to announce."
Artis was considering selling preferred shares, a new wrinkle in REIT financing, sources say. The REIT owns 83 retail and office properties in Western Canada, and has a $300-million market capitalization.
AIMA NAMES NEW CHAIR
The domestic hedge fund community got an articulate and battle-scarred leader this week, as Gary Ostoich stepped up as the new chairman of the Alternative Investment Management Association Canada, better known as AIMA.
Mr. Ostoich was midwife to many of the country's hedge funds as a rainmaking lawyer with Toronto-based McMillan, then jumped into the industry, first as president of Salida Capital, and now as president of Spartan Fund Management, a multistrategy hedge fund.
The AIMA torch is being passed from fellow fund manager Phil Schmitt of Summerwood Group, who was AIMA's chairman for the past three years.
AIMA is an industry association that attempts to set standards for funds, and Mr. Ostoich has been involved with the group since it was founded in 2003. He said in a press release that he will work to further industry-wide causes such as "fostering transparency, investor education and best practices."
See Andrew Willis's Streetwise Blog at ReportonBusiness.com
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