Barrick Has Closed All Its Gold Hedges

Barrick Gold (formerly American Barrick) is the biggest gold producing company, one that managed to survive the gold decline all the way through the 1990s. Unfortunately for them, one of the techniques they used got them into a spot as the gold price has advanced.

That technique is forward selling of (some of) their production, or hedging. Barrick got into the habit of forward-selling some of their production back in the old bear-market days, and the habit stuck even when bear turned into bull. As a result, the company saw itself selling some of its gold at well below market prices.

According to this Globe and Mail report, Barrick has now eliminated its hedges. It can now benefit fully from any gold-price advance.

Cost? US$3.9 billion in newly-issued equity, diluting existing shareholders by about 10%, and US$1.25 billion in new debt securities. Helluva price for feeding a habit.

Of course, I was a little unfair in the previous sentence. Said habit enabled them to ride out the 1990s decline. More worrisome for the future, are similar habits built up in the gold bull market. If a group of experts at the world's largest gold producer can be fixated for years because the earlier fixation paid off, and was celebrated as shrewd management, then it's quite possible for a gold bull to be fixated after years of buying gold mechanically and being thought of as an "investment genius" for doing so.

Moral? In investments, never put anything to bed! 'Tis better to be a dullard than a "slaughtar'd," unless you enjoy the ride more than realizing profits.


Update: The lodestone removed, Barrick shot up 7.6% yesterday. The dilution seems to have been worth it.