Barrick joins Lihir in huge gold hedge buyback

9:55p ET Tuesday, May 1, 2007

Dear Friend of GATA and Gold:

Between Barrick Gold's announcement today, appended here, and Lihir Gold's announcement two weeks ago (http://www.gata.org/node/4999), the two companies have just taken almost US$1.1 billion in gold out of the market.

Maybe that explains the recent acceleration of central bank gold dishoarding (http://news.goldseek.com/GoldSeek/1177426920.php), since otherwise the gold price would explode and regular central bank money and bonds would start looking even more sickly.

In any case that Barrick would accept its first quarterly loss in five years so that it might spend more than half a billion dollars to cancel all the gold hedging done for its operating mines suggests that even the company that has proclaimed itself to be the agent of the central banks in the gold market (http://www.lemetropolecafe.com/img2003/memoformotiontodis.pdf) is expecting gold to rise to uncomfortable levels.

Barrick's mines in development still support huge gold hedging positions, but the company says it plans to reduce hedging even more.

All this repurchased gold probably will continue to come out of the vaults of the Western central banks, likely underwritten by pledges of gold from the U.S. Treasury Department (aka "deep storage gold," gold yet to be mined), so the impact on the gold price may not be immediate. But until the secretary of the treasury goes to the corner of Broad and Wall streets in New York and declares that the United States can save its currency only by returning to something like the gold standard, Barrick's announcement today probably will be as close as you'll get to an engraved invitation to the last Great Bullion Sale.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Barrick Has First
Quarterly Loss
Since 2001 on Hedges

By Choy Leng Yeong
Bloomberg News Service
Tuesday, May 1, 2007

http://www.bloomberg.com/apps/news?pid=20601082&sid=aHLM1QSrEo.w

Barrick Gold Corp., the world's largest gold producer, reported its first quarterly loss in more than five years as the company incurred $557 million in costs to exit sales contracts at below-market prices.

The first-quarter net loss was $159 million, or 18 cents a share, compared with net income of $224 million, or 29 cents, a year earlier, Toronto-based Barrick said today in a statement. Excluding the cost to exit the contracts, profit was $398 million, or 45 a share, topping analysts' estimates.

Chief Executive Officer Gregory C. Wilkins, betting prices will keep rising, exited contracts to sell 2 million ounces of gold at fixed prices that were 41 percent below bullion on spot markets. Gold has more than doubled in the past five years, and rose 17 percent on average during the quarter.

"I wish they had done it earlier," said Frank Holmes, chief investment officer at San Antonio-based U.S. Global Investors Inc., which manages almost $5 billion including Barrick shares. "We like stocks that are unhedged. Operations outside the non-cash charge were better than what the street expected."

Excluding the hedges, the company was expected to earn about 39 cents, based on the mean estimate of nine analysts surveyed by Bloomberg. The last time the company reported a net loss was the fourth quarter of 2001.

Barrick said it sold gold at an average price of $386 an ounce in the quarter, 28 percent lower than a year ago, as it exited forward contracts at below-market prices. Lower prices led to an 8.3 percent drop in sales to $1.09 billion, even as production rose.

"It was cost containment that enabled them to deliver better-than-expected results," excluding the hedging costs, said Victor Flores, a New York-based analyst at HSBC Securities USA Inc. He has estimated profit excluding hedging costs of 40 cents a share and doesn't own any Barrick shares.

Shares of Barrick were unchanged at C$31.15 at 4:25 p.m. in Toronto Stock Exchange trading, giving the company a market value of C$26.9 billion ($24.2 billion). The shares have fallen 9.6 percent in the past year.

Barrick cut hedges by 9.4 million ounces in 2006, mainly those inherited from its $10 billion acquisition of Placer Dome Inc. The company exited more contracts than any other last year, accounting for 62 percent of the world's total, London-based researcher GFMS Ltd. estimates.

Barrick has said it will incur $65 million in costs this quarter by exiting another 500,000 ounces of contracts.

"Going forward, our operating mines are completely un- hedged, able to sell production at spot prices and thereby enjoy expanded margins in this strong gold-price environment," Wilkins said in the statement.

The company still has 9.5 million ounces of gold hedged in forward contracts to help finance its Pascua-Lama mine project on the border of Chile and Argentina and the Pueblo Viejo mine development in the Dominican Republic. Barrick sought to build the $1.5 billion Pascua-Lama project in December 2004 after gold prices rallied.

Gold futures in New York averaged $652.79 during the quarter, up 17 percent from $557.40 a year earlier. Prices reached a 26-year high of $732 on May 12, 2006.

Most producers increased forward sales when gold touched a 20-year low in 1999 to hedge against further declines in prices. Mining companies have been unwinding those contracts during a rally in gold that is entering its seventh year.

Cia. de Minas Buenaventura SA, the world's seventh-biggest gold miner, posted a 71 percent drop in first-quarter earnings partly on costs related to cutting its gold hedges by a quarter.

The Lima-based company said on April 27 it plans to reduce its hedge book further to take advantage of surging gold prices.

Output in the fourth quarter rose to 3.7 percent to 2.03 million ounces as Barrick added mines in Nevada, Australia and Tanzania from its Placer acquisition and built new mines. The cash cost to produce an ounce of gold rose to $313 from $285.

Barrick kept its February cost forecast unchanged at $335 to $350 an ounce, up from $282 in 2006. The company in November forecast an increase of 15 percent to 18 percent because of lower-grade ores and inflation. The company also kept its production forecast at 8.1 million to 8.4 million ounces, down from 8.6 million ounces in 2006.

Newmont Mining Corp., the world's second-biggest gold producer, posted a 67 percent plunge in first-quarter profit to $68 million as output slumped and mining costs rose. The company on April 26 raised its forecast for the costs of mining and selling gold this year by 32 percent to $400 an ounce, up from its September forecast of an increase of 25 percent.

Newmont said the cost of mining and selling gold jumped 53 percent to $421 an ounce as a weaker dollar boosted spending in Australia and the company struggled to bring new mines in Nevada into full production.

* * *

Join GATA
at the
World Gold, PGM, and Diamond Investment Conference
in Vancouver, British Columbia, Canada
Sunday and Monday, June 17 and 18, 2007

http://www.cambridgeconferences.com/ch_june2007.html

* * *

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