Michael B. Krause

Barrick Gold Nails the Hedge

The 9.5m ounces sold at under or near production cost are an obvious penalty, but you have to realize ABX has hedged crude buying (big input cost) at $90 for this year. It would make them no sense to deliver those hedges right now. I think Aaron is buying time for when he can get production cost closer to the value of the hedges (and take advantage of crude at $40) ... maybe 2 years out? Then it makes sense to deliver.

The company has 125m ounces of reserves, and this hedge basically penalizes under 10% of the reserve as a wash with 0% profit possibility. With respect to the other 90%, they can capitalize on spot gold.

Since the market has known about this forward for a long time, it is not an issue and has already been well priced into the stock. (basically, with the hedge we're talking about 500-600m in forgone revenues per year for the next 10 years assuming gold were to average 900/oz over that period). But if gold went to $2k/oz, ABX's revenues on the unhedged portfolio would still more than double. Holding all other input costs constant (unrealistic), gross profit would move from $3b/yr to $12+ b/yr.. Quadruple in earnings, quadruple in stock price.

You get the idea why people like miners.

Buy Treasuries for a Trade

For a hedge against variable rate debt. I stand to benefit much more if rates fall.