Canadian gold miner Barrick Gold Corp. (ABX) has eliminated its gold hedges and now has full leverage to the gold price on the industry’s largest gold production and reserves. Barrick now expects to fully benefit from the rising gold prices.
 
Gold hedges are fixed price (non-participating) gold contracts. Floating contracts are floating spot-price (fully participating) gold contracts that are economically similar to a fixed US dollar obligation and do not require any activity in the gold market to eliminate. Hedging is normally used to insulate companies from market price fluctuations and provide a level of financial stability for their operations.
 
In September, Barrick had announced its plans to eliminate all of its gold hedges and a substantial portion of the liability related to its fully participating floating contracts. The gold hedges were contracts where Barrick had sold forward gold ounces and would receive a fixed price upon delivering them. As such, Barrick did not benefit from any increase in the gold price but the mark-to-market liability, or costs of these contracts, would increase with a rise in the gold price.
 
In the last two years, Barrick eliminated its legacy project gold hedge position of 9.5 million ounces at a weighted average gold price of $930 per ounce, by either settling its fixed price contracts or by converting fixed price contracts into floating contracts. The company is also looking to remove 6.5 million ounces of floating hedge contracts, whose liability does not change with the price of gold. Barrick has reduced the obligation on those contracts to $700 million from an initial $3.7 billion.
 
To fund the elimination of the gold hedges and a substantial portion of the floating contracts liability, Barrick issued new equity in September for net proceeds of $3.9 billion and a further $1.25 billion in October in new long-term debt securities for total net proceeds of $5.1 billion. For 2010, Barrick expects gold production to grow to 7.7-8.1 million ounces at lower total cash costs than 2009. The company also expects production to continue to trend higher past 2010, while extraction costs should come down as it opens larger lower-cost mines.
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