Barrick Gold Corp. bowed to investor pressure and abandoned its controversial hedging practise for at least a decade, saying it no longer creates shareholder value.
"The commitment to hedging is gone...," Barrick chairman and founder Peter Munk said Friday, according to Reuters. "Hedging to us is no longer a requirement for running our business as it no longer creates shareholder value."
He said the Toronto-based gold producer will not do any more hedging over the next decade in order to benefit from higher gold prices. Barrick has one of the biggest hedge books in the industry.
"Hedging enabled us to strengthen our balance sheet. Today we don't need it," he told reporters at a gold investment summit in London, adding that the company has plenty of cash on hand.
Shares of Barrick rose as much as 2.7 per cent on the Toronto Stock Exchange late Friday morning. They closed up 0.7 per cent or 20 cents at $28.20, near their 52-week-high of $28.95. Barrick is Canada's biggest gold producer and the third largest in the world.
The price of the bullion also shot up on international markets. In London, gold flirted with an eight-year high and reached $400 (U.S.) an ounce before pulling back. In New York, COMEX gold for December delivery jumped $2.70 to $396.40, retreating from a high of $398.20.
Hedging, the practice of selling gold before it is mined in order to protect profits when the price of the bullion is low, has been widely criticized by investors who want the company to take full advantage of higher gold prices to boost profit.
Still, Mr. Munk's comments are not completely surprising because the company had already stated its commitment to reducing its hedging program.
Geoff Stanley at BMO Nesbitt Burns Inc. said in a Friday morning report that Mr. Munk's comments were "in line" with his expectations, given that Barrick's president and chief executive officer Gregory Wilkins said last month the company wanted to reduce its hedge book.
As of Sept. 30, Barrick had 16.1 million ounces of gold committed to forward sales, Mr. Stanley noted. "The reported mark-to-market value of the hedge book was reported as at Sept. 30, 2003 at $384/oz gold at $1-billion."
Hedging helped Barrick churn out solid financial results at time when gold prices tumbled lower.
Mr. Munk defended the practice of hedging saying it helped transform Barrick into the strongest financially positioned gold company in the world.
"We have $2-billion in cash or in undrawn credit. But hedging today is not perceived favourably by the investment community. Being prudent today does not carry the premium which it carries in every other business — everybody is risk averse except the gold business," he told a Reuters reporter.
Barrick's share price had taken a hit recent years as many investors, wanting full exposure to a rising gold price, sold the stock in favour of producers that did not sell any of their production forward.
The company fired its former CEO in February after the stock fell in response to the hedging policy. Mr. Wilkins, who took over as CEO shortly after, acknowledged Barrick's hedging program had become a "lightning rod" for investor discontent.
Mr. Munk also said Friday the company would consider de-hedging as an option to create shareholder value. "We could well do that in terms of assigning contract positions to our long term financing plans — project financing for mines," he said.
He said however that this was something the company had not done yet. "We're totally open minded now," he told Reuters.
© The Globe and Mail
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