When most of your business is sitting under the ground we walk on, and it fluctuates in value literally every minute of the day, you try to find create ways to minimize those potential price swings. And sometimes if you think the value is headed lower, you try to lock in what you believe might be a higher price.
Thus the $5.6 billion little headache Barrick Gold revealed late yesterday when it said it planned sell stock and use the proceeds to effectively cancel out some hedges that, well, didn’t exactly hedge the way they thought they would.
The company sold some 94.75 million new shares today, raising about $3.5 billion. For existing shareholders, you like the idea that the company is removing hedges that will effectively allow the stock price to trade more tied to gold prices. But you can’t really like the fact that a bad hedging decision has just led to a $5.6 billion charge and pretty significant dilution – the offering increases shares outstanding by a little more than 10%.
And until Barrick actually unwinds the hedges, it continues to have exposure. It has 9.5 million ounces of gold tied to hedging contracts. About 3 million of those are in fixed-contracts. For every $10 move in the price of gold, there is a mark-to-market impact to the company of $30 million. So, if gold was to continue moving higher, bigger market-to-market losses would occur.
One of the winners in this mess – The 30 or so banks and investment banks that were part of the stock offering. It generated $122.5 million in underwriting fees.
The stock closed today at $36.95, the price at which the offering came to market. That’s a 5.98% discount to where the stock closed yesterday.