Hedging in the Canadian Gold P

Hedging in the Canadian Gold Producers’ World

Barrick is the largest producer of gold in the world. Its operations, which include mines and exploration and development projects, are found on four continents.
In a field where many mining companies are small, operating one or two mines or exploring for one or two new mines, Barrick is certainly the leader. It is worth almost $30 billion (CAD$), meaning that it is worth more than such household names as Canadian Tire or Air Canada.
Barrick drew headlines around the world in 2009 when it announced that it would stop its gold hedging program. Gold had been rising for the previous few years, and Barrick did not participate in this price movement. Therefore, in late 2009, Barrick’s chief financial officer, Jamie Sokalsky, announced the end of the gold hedging program, at a time when gold had risen to about $1000 an ounce. “We made this decision to gain full leverage to the gold price on all future production, based on an increasingly positive outlook for gold,” he said. “By eliminating the gold hedge book, the company will participate in future gold price movements.” And Barrick was not alone. Other gold producers such as Newmont Mining Corp. and AngloGold Ashanti Ltd. also announced ending their gold hedging programs.
Gold did continue to rise, though it did not quadruple in price as it had during Barrick’s hedging program. But the company did not seem to benefit greatly from this movement. Commenting a year after Barrick stopped its hedging, John Daly in The Globe and Mail noted that when the company eliminated its hedging program, its shares were about $42. A year later they had increased by 5 percent. However, over that same period, gold increased about 20 percent, from $1000 an ounce to almost $1200 an ounce. While economic theory says that gold producers’ shares should rise at least in the same proportion as the underlying metal, this did not happen. The worldwide economic problems in 2010 saw investors fleeing stocks, including gold producers, for safer investments, such as Treasury bills and gold itself. This led to deeply depressed stock prices felt around the globe.
Unfortunately, while Barrick did not participate fully in gold’s rise, it has participated in the recent decline of gold prices. At the beginning of 2013, gold was about $1700 an ounce, and Barrick shares traded in the $35 a share range. By the end of the year, gold dropped to about $1350 an ounce, and Barrick’s shares declined to the $20 range. Since then gold has declined further, and Barrick’s shares have remained below the $25 range.
Interestingly, the decline in gold prices has lead some mining firms, including Barrick, to once again talk about hedging their gold holding, though this time it is to lock in current prices in the belief that gold may fall further in the future. Speaking in early 2014, the new Chairman John Thornton said, “As an outsider, I always thought it made great sense to hedge. I can’t understand for the life of me why that wouldn’t be an active topic that you would be carefully following at all times.”
By 2016, hedging was almost becoming more acceptable in the gold industry. Canadian firm New Gold Inc. announced it was starting a hedging program in March 2016. A few days later mining company B2Gold Corp. announced it was starting to hedge, as were some other firms in Australia and Africa.

Questions

1. Undertaking a hedging program is a management decision. Are company managers likely to undertake a program (such as hedging) once they have so publicly announced that they are scrapping it, even in the face of changing economic circumstances?

2. Hedging programs are not free (it is estimated that it cost Barrick over $5.6 billion to exit its hedges). When do you think a company should enter a currency or other commodity hedging program? What factors should a manager consider?

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