The last time Barrick Gold’s CEO was bullish on gold above $1,000, it collapsed, as pointed out by Bespoke Investment. He stopped hedging then and was proven very wrong.
Well, he’s at it again. Barrick (ABX) announced on Tuesday that they will stop hedging.
AP: To raise money for the pay off the hedges, Barrick will issue about 81.2 million shares at $36.95 per share. It will use $1.9 billion to eliminate all of its fixed-priced gold contracts within the next 12 months and another $1 billion to eliminate a portion of its floating spot price gold contracts.
It’s a nice way to take advantage of bullish sentiment for gold by selling your shares into the market. If gold falls, Barrick takes a hit for not being hedged, but will have probably ended up selling shares at a high price since Barrick shares will likely fall. Thus they are in a sense replacing one hedge with another.
Still, can’t a company like this stick to being a gold production company rather than a giant commodity hedge fund? This would be a far more interesting stock if they simply locked-in current gold prices via hedges, and thus in turn locked-in sizeable profits since their production cost is much lower.
Below, is a video of Barrick’s March 2008 blunder, which Bespoke highlighted previously.
“Would you hedge here?”
“Nope. I think there’s lots of room to go in the gold price” (Down?)
(Tip via Abnormal Returns)