Barrick Gold will issue $3 billion in stock to eliminate all of its fixed-price gold hedges and a portion of its floating hedges, taking a $5.6 billion hit to third-quarter earnings, the world's top gold miner said on Tuesday.
For Barrick, which expects gold prices to keep rising, the deal should remove what has been a big drag on its shares, the legacy of the company's past reliance on hedging, a practice it abandoned in 2003.
During times of weak prices, gold miners often sell a portion of their future production to protect, or hedge, against the possibility that prices will fall.
When prices rise, as they have done since 2001, the company suffers because value of the future production they've sold does not increase with the gold price.
It's long overdue, John Ing, president of Toronto investment dealer Maison Placements, said of the move.
In the bear market, (hedging) saved a lot of people, but in the bull market it just added supply to the market ... it was the original derivative.
Barrick took a $557 million charge to buy out its production hedge book two years ago, and has faced repeated questions from analysts and shareholders since then about its plans for the remaining 9.5 million ounces it had hedged to finance projects.
The gold hedge book has been a particular concern among our shareholders and the broader market, which we believe has obscured the many positive developments within the company, Barrick Chief Executive Aaron Regent said in a statement.
Barrick will spend $1.9 billion to eliminate all of its fixed-price gold contracts -- on which the company effectively lost money every time the gold price rose -- by buying gold on the open market and delivering it into the contracts.
It will also pay $1 billion to eliminate some of its floating spot price contracts -- the liability on which does not change with fluctuations in the price of gold -- leaving about $2.7 billion of floating hedges on the books.
However, its decision to pay down part of the hedge position means it will have to take an accounting loss on the full $5.6 billion worth of the liability.
After the deal, the company will eliminate the remaining floating hedges when more attractive sources of debt capital are available.
The bought deal, which comes on a day gold topped $1,000 an ounce -- is one of the largest ever in Canada, eclipsing a C$2 billion deal by Royal Bank of Canada in November 2008.
Barrick will issue 81.2 million shares at $36.95 each, a 6 percent discount to the stock's New York closing price of $39.30 on Tuesday.
The price ... is viewed by a number of people as being attractive, especially as Barrick is relatively undervalued compared to many of its peers, said a source at one of the bookrunners on the deal.
A raging gold market also made the timing right, the source said.
There was a very broad-based call from most investors in the company to eliminate their hedge book and make them a pure play on gold, with total upside exposure to the movement in bullion.
Bill O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey, said the deal would not likely have a material impact on the gold market.
Maison Placement's Ing said the deal should give a boost to Barrick's shares, despite the stock dilution.
They're the premiere gold company. Now, with the albatross of the hedges removed, I think that it should get a good reception.
(Additional reporting by Pav Jordan; editing by Rob Wilson)