CANADIAN PERSPECTIVE: Gold and silver shine for Barrick

Toronto's Barrick Gold, the world's largest gold producer, continues doing things in a big way. About 7.5 mill...

Toronto's Barrick Gold, the world's largest gold producer, continues doing things in a big way. About 7.5 million oz of gold to be produced this year, and US$3.5 billion to be raised in a public offering to eliminate its gold hedging program.


The $3.0 billion bought deal offering anounced on Sept. 8, ballooned to US$4.0 billion a day later. Barrick plans to issue more than 81.2 million common shares at a price of US$36.95 per share. The deal will be underwritten by a syndicate led by RBC Capital Markets, Morgan Stanley & Co., J.P. Morgan Securities and Scotia Capital.


Barrick will use $1.9 billion of the net proceeds to eliminate all of its fixed priced gold contracts (hedges) within the next 12 months. The remainder will be used to eliminate a portion of the company's floating spot price gold contracts.


Barrick is very bullish on the price of gold. It sees a stronger price for many years as global monetary and fiscal reflation continues. Along with this reflation will come an increased risk of higher inflation with the corresponding negative impact on the value of global currencies. It sees a robust gold supply/demand picture. Moreover, Barrick thinks by eliminating its hedge book and floating contracts, it will attract a broader range of investors to the benefit of its share price performance.


After sticking for many weeks around the US$940-960/oz mark, the gold price once more closed over US$1,000/oz on Sept. 8, 2009.


Those are solid reasons to make the move now.


Nor is Barrick the only gold miner to unhedge production. There has been a general move away from hedging since 2001, when more than 100 million oz were hedged. By the middle of 2009, that number stood at 14.7 million oz with more cuts expected.


Now that I have painted a picture of Barrick as a savvy gold producer, I ask readers to shift gears and think of Barrick as a silver producer. Where there is a gold deposit, there is often silver to be found, and that is the case at Barrick's South American mines.


On Sept. 8, Barrick announced a deal with Silver Wheaton of Vancouver whereby Silver Wheaton will buy 25% of the silver output from the Pascua-Lama project and 100% of the silver from the Veladero, Lagunas Norte and Pierina mines. Silver Wheaton has agreed to pay a US$625 million deposit over three years plus the difference between US$3.90/oz and the actual price of silver per ounce delivered when the silver price is above US$3.90.


The Pascua-Lama project, straddling the border between Chile and Argentina high in the Andes Mountains, carries pre-production capital expense of between US$2.8 billion and US$3.0 billion. Silver Wheaton's US$625 million injection will certainly be welcome. The mine has proven and probable reserves that contain 17.8 million oz of gold and 718.0 million oz of silver, making it the world's third-largest silver deposit, notes Silver Wheaton. Start-up is expected in late 2012 with production to follow in early 2013.


To finance the initial payment to Barrick, Silver Wheaton announced a US$250 million bought deal. It is issuing 22.5 million shares at a price of US$11.10 each. The underwriters have an option on an additional 3.4 million common shares at the same price.


It seems to me that everything Barrick touches, even silver, turns to gold. But I think the company wants it that way.


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