Barrick Gold posts US$5.4 billion net loss on windup of gold hedging program

TORONTO - Barrick Gold Corp. (TSX:ABX) lost US$5.4 billion in the third quarter due to the windup of its gold hedging program, but the big miner said this move, as well as several low-cost projects set to come online in the next few years, position it to prosper from a rising gold price.

TORONTO - Barrick Gold Corp. (TSX:ABX) lost US$5.4 billion in the third quarter due to the windup of its gold hedging program, but the big miner said this move, as well as several low-cost projects set to come online in the next few years, position it to prosper from a rising gold price.

"Our production will be higher next year and at lower costs. We have a world-class pipeline of projects under construction and a number of additional projects in various phases of feasibility studies," Barrick president and CEO Aaron Regent said on a conference call Thursday.

"Our company structure has been simplified with the elimination of the hedge book, we have a strong financial position to support our operations and projects, and finally we have a number of competitive advantages which we believe will continue to pay dividends in the future," he added.

The market agreed, sending Barrick's shares up by $2.62 or 7.1 per cent to $39.66 in Thursday trading on the Toronto Stock Exchange.

The Toronto-based gold miner, which reports in U.S. dollars, said its quarterly loss included a non-cash accounting charge of $5.7 billion related to its hedging program.

Adjusting for the accounting charge, Barrick had a profit of $473 million or 54 cents per share, up 17 per cent from $404 million or 46 cents per share last year.

Barrick is the world's biggest gold company, with third-quarter sales of nearly $2.1 billion in the third quarter - up from just under $1.9 billion last year.

Regent said Barrick took several steps during the quarter to improve the company's performance and strategic positioning going forward.

That included plans to eliminate its gold hedging program within 12 months.

The hedging program, which was designed to lock in prices for future sales to provide insurance against a drop in gold prices, has become a drag for Barrick. The hedges prevented Barrick from taking full advantage of the rising price of bullion, which has recently been trading above US$1,000 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," said Barrick chief financial officer Jamie Sokalsky.

Sokalsky said the company has so far raised a total of $5.1 billion by issuing equities and long-term debt and as of Wednesday had eliminated 1.1 million ounces of gold hedges, or approximately one-third of its hedged position.

"By eliminating the gold hedge book, the company will fully participate in future gold price movements," Sokalsky said.

"Our overall leverage is reduced and the capital structure is simplified and strengthened. And we know that investors prefer fully unhedged producers and with this plan we are now better aligned with those interests."

Barrick said its average realized gold price for the quarter was $971 per ounce, or $11 higher than the average spot price of $960 per ounce.

And Regent said he expects the price of gold to continue to rise due to the current macroeconomic environment.

"Low interest rates, the increase in the money supply and current and future government deficits is continuing to put pressure on global currencies and is increasing the risk of significant inflation in the future. This has resulted in an increased demand for gold by investors around the world," he said.

"While gold prices appear high in nominal terms, in real terms they are still 50 per cent below the peak levels realized in 1980, and from an industry perspective mine supply continues to decline and we expect this trend to continue for the foreseeable future," he added.

Barrick produced 1.90 million ounces of gold in the quarter at total cash costs of $456 per ounce, or net cash costs of $371 per ounce after applying credits from sales of non-gold metals such as copper and silver that are mined along with the gold.

Revenues fell short of analyst expectations but Barrick's adjusted earnings were above a consensus estimate compiled by Thomson Reuters.

On average, analysts had called for $2.147 billion in revenue and 47 cents per share before unusual items such as the charge for the hedging program.

Barrick said it is on track with its full-year production guidance of 7.2 million to 7.6 million ounces of gold at total cash costs of $450 to $475 per ounce or net cash costs of $360 to $385 per ounce.

The company expects production in 2010 to grow to between 7.7 million and 8.1 million ounces of gold at lower cash costs than this year.

Barrick has several low-cost projects positioned to come online over the next five years, including Cortez Hills in Nevada, expected to begin production in the first quarter of 2010; Pueblo Viejo in the Dominican Republic, expected to begin production in the fourth quarter of 2011; Pascua-Lama on the border between Argentina and Chile, expected to begin production in the first quarter of 2013; and Buzwagi in Tanzania, which began production in May and is on track to produce 200,000 ounces this year.

 
 
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