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Barrick Gold Corporation (USA) (ABX) Hedges Its Product and Its Portfolio

Barrick Gold:  Management issues

Currently, there is a disconnect between Barrick Gold’s shareholders and the top management. The former have given their non-binding vote of no-confidence to the new co-chairman John Thornton’s $17 million compensation package. The company’s founder and the other co-chairman Peter Munk thinks that Thornton should be given a lucrative package so that he would stick with the company for the long haul. Why does the 85-year old founder wants to keep Thornton? This was explained in an emailed statement when Munk said, “I searched the world for a successor” and with Thornton, he believes that he could have found one.

The cost blowout at one of its biggest projects has already angered shareholders. The huge compensation package being awarded to Thornton, which includes an $11.9 million sign-on bonus, could not have come at a worse time. The company is currently the largest indebted gold miner. It has recently raised $3 billion in a bond offering to refinance its enormous $14.8 billion debt. Barrick Gold has the second-lowest investment grade rating by Standard & Poor’s and Moody’s Corporation (NYSE:MCO) with a negative outlook, raising its borrowing costs.

The specter of hedging

Barrick Gold Corporation (USA) (NYSE:ABX) has already announced that it will begin forward hedging of its gold production into the teeth of what is unsustainable selling in the futures market. For that reason alone, gold investors should shun the company. Forward hedging was used as a capping mechanism during the last equity bubble in the lead up to the dot.com bust. Barrick was at the center of it with a hedge book so big it took the company years to unwind it, all the while providing bullion bank fuel to push the price down near its cost of production at the time, around $250 per ounce.

Now we’re seeing Barrick Gold Corporation (USA) (NYSE:ABX) entering into this activity again just as we are seeing a similar condition playing out in the markets with gold being pushed down near its cost of extraction.

Much has been made of the selling that has taken place from the SPDR Gold Trust (ETF) (NYSEMKT:GLD), but a great deal of that physical metal that was redeemed is not sitting around idle as fuel to short the market. It was sold and it will likely never return to the ETF.

If the major gold producers begin to hedge forward to save their skins like was done in the 1990’s, not only will the gold bull market not resume soon, it will starve the industry of a great deal of much-needed investment capital to satisfy demand at these prices, prices which are already looking unsustainable given the reported premiums being paid for the physical metal today.

The article Barrick Hedges Its Product and Its Portfolio originally appeared on Fool.com and is written by Peter Pham.

Peter Pham has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Peter is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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