The world’s largest gold producer, Barrick Gold Corp. (ABX) and its wholly owned subsidiary, Barrick Australia Finance Pty Ltd., are planning to issue $1.25 billion in debt securities comprised of $400 million of 4.95% notes due 2020 and $850 million of 5.95% notes due 2039. The offering is expected to close on Oct 16. Barrick plans to use the net proceeds from the offering to further reduce the liability related to its floating spot price (fully participating) gold contracts.

In September this year, Barrick had raised about $3 billion representing 81.2 million common shares at a price of $36.95 per share as a part of its plan to eliminate gold hedges. Barrick’s gold sales contracts — which comprise gold hedges and floating contracts — totaled 9.5 million ounces with a mark-to-market position of negative $5.6 billion. Barrick Gold intends to use $1.9 billion of the net proceeds to eliminate all of its fixed priced gold contracts within the next 12 months and about $1.0 billion to offload a portion of its floating spot price. The company expects a $5.6 billion charge to earnings in the third quarter due to a change in accounting treatment for the contracts.

Gold hedges are futures contracts that obligate a company to sell the metal at pre-agreed prices. Although these hedges guarantee certain cash flows, they often commit metals producer to ship the gold at prices lower than the current spot prices.

Barrick’s decision to pay off its hedges is based on a bullish outlook for gold, prices of which have risen beyond $1,000 per ounce, highest in the last seven months. The weak U.S. dollar, continuing low interest rates and inflation have dampened returns on holding cash and other liquid investments, driving investors to gold as an alternative source of investment. This in turn has fueled the rise in gold prices. For 2009, Barrick expects gold production to be 7.2 to 7.6 million ounces at net cash costs of $360 to $385 per ounce or total cash costs of $450 to $475 per ounce. It expects gold production in 2010 to grow to 7.7 to 8.1 million ounces at lower total cash costs than 2009.

Last year, Newmont Mining (NEM), the Denver-based gold company, eliminated its entire 1.85 million-ounce gold hedge position foreseeing a rise in gold prices. The company issued new equity and divested its non-core merchant banking business to eliminate the hedges. To get maximum exposure to spot gold prices, another gold producer, AngloGold Ashanti Ltd. (AU) also undertook an extensive restructuring of its hedge book in July this year, reducing its overall commitment by about 1.4 million ounces.

We maintain our Neutral recommendation on Barrick Gold.

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