Barrick Raises $3 Billion to Retire Hedges

Barrick Gold (ABX) launched the largest bought deal ever seen in Canadian equity markets on Tuesday, selling $3-billion (U.S.) of stock as it moves to close down its hedged gold production.

On a day that had already seen a $1-billion equity sale from Fairfax Financial (FFH), Barrick is selling 81.2 million common shares at $36.95 each. The deal is being led by RBC Dominion Securities, Morgan Stanley, JP Morgan and Scotia Capital; these underwriters are shouldering the risk of selling shares of the world’s largest gold miner.

The underwriting was done at a 6 per cent discount to the price of Barrick’s stock on Tuesday. The market’s reaction to this deal will be fascinating, as it eliminates hedged gold production that was a major negative for the stock, but comes at a price.

Under its current hedge contracts, Barrick is locked in to selling 9.5 million ounces of future production at an average cost of $375 an ounce.

To put these numbers in perspective, a senior global gold mining company produces 1 million ounces of bullion a year. And gold, in case you missed the news, went through $1,000 an ounce on Tuesday. Barrick’s hedged production, put in place to give the company predicable future earnings, had become an enormous millstone.

While there has long been speculation that Barrick would move to cut its hedged production - the market places a premium on pure plays in bullion - this move came as a surprise. Sources say Barrick excutives first briefed investment bankers on their plans on Friday, and the underwriting came together over the Labour Day weekend.

In a news release, Barrick said it intends to use $1.9-billion of the cash to eliminate all of its fixed-price gold contracts within the next 12 months and approximately $1-billion to eliminate a portion of its floating spot price gold contracts. The company will take a $5.6-billion charge to earnings in the third quarter as a result of a change in accounting treatment for the contracts.