St. LOUIS () -- In addition to reporting record second-quarter profits of $459 million up from $47 million, Barrick [NYSE:ABX; TSX:ABX], perhaps more interesting to gold investors, announced yesterday that the legacy Placer Dome hedge book was no more.
"We continue to have a very optimistic view on where gold prices are likely to trade, not just in the near-term, but on a sustainable basis," said Barrick CEO and President Greg Wilkins in a conference call.
According to a company , during the second quarter, the remaining legacy Placer Dome gold hedge position was eliminated for a total reduction of 7.7 million ounces year-to-date. The total cost of reducing the hedge position was approximately $1.8 billion, of which $300 million remains to be paid.
Wilkins said that there is some additional accounting that will take place in the 3rd and 4th quarters. Barrick plans on removing $79 million in revenue in Q3 and $18 million in Q4 to fully account for the effect of closing these contracts.
"There will be no more losses associated with the Placer hedge book beyond 2006," Barrick CFO Jamie Sokalsky told analysts in the same conference call.
The corporate gold sales contract position currently totals 2.8 million ounces, but Barrick said it intends to continue to reduce this position "opportunistically," such that it is eliminated by no later than the end of 2009.
Barrick reported that its realized price on gold sales was reduced by $35 per ounce, primarily as a result of hedge adjustments in the quarter.
Sokalsky said that for the moment Barrick is content to allow its 9.5 million-ounce project gold sales contracts to continue, because there's "security to have that support."
Philip Klapwijk, chairman of GFMS, told Resource Investor that the timing is very interesting, adding that Barrick may well have already had a trading strategy in place for dealing with this scenario or "they came up with one pretty quickly!"
According to Matthew Turner, commodities analyst with Virtual Metals, Barrick said in their Q1 financial statement that the company planned to do another 3 million ounces this year (on top of the 4.7 million ounces it had done in Q1).
"They said they had already done 1 million ounces. So the first 1 million ounces of the 3 million ounces was done sometime between April 1 and May 3," Turner told RI. "The next 2 million ounces we don't know when they did it, but it will be sometime between May 4 and June 31."
Turner ventured a guess that Barrick might have taken advantage of the weaker gold prices in late May. After gold hit highs of $730/oz in mid-May, the price fell back $100 by early June.
Wilkins said that the volatility in the gold price in the quarter, hitting highs of $730/oz and lows of $550/oz, did indeed provide Barrick with the opportunity to aggressively reduce Placer's hedge book.
Barrick delivered production ounces against the contracts and simply "went into the market and closed those contracts out," added Sokalsky.
Klapwijk said that "if they got their timing right and bought back a larger quantity than originally planned for the quarter during June following the slide in price ... this may help explain why gold snapped back so strongly in the second half of June."
The spot price of gold closed at $567.25/oz on June 14, but then proceeded to gain $33.15 in two weeks and $104.25 in about a month, closing at $671.50 on July 17.
According to Turner, in the last issue of the Hedge Book, Virtual Metals did a regressive econometric analysis which suggested that 5 million ounces of dehedging could increase the gold price by up to $25/oz in the current quarter and the next, "though it is hard to be definitive," he said.
A news flash about the soon-to-be-released reports a total hedge reduction of 5.1 million ounces last quarter, accounting for Barrick's 3 million ounce reduction and AngloGold Ashanti's [NYSE:AU] 1 million ounce reduction.
Using Turner's analysis, this could have indeed contributed to gold's $100/oz jump from mid-June to mid-July.
Turner calculated 5.1 million ounces to amount to about 158 tonnes. Total gold supply is in the order of 4,000 tonnes a year, or 1,000 tonnes a quarter, so the total dehedging represents about 15% of global demand, he said.
"This is a fair proportion, though remember the market knew about 1 million ounces from Barrick, and perhaps a 'normal' level of dehedging of 2 million ounces was anticipated," said Turner.
However, the rate of global dehedging could slow again in the second half of the year as Barrick has now completed their promised 2006 reduction of 7.7 million ounces - though as the company has said it will do 2.8 million ounces more by 2009.
Gold for October delivery ended down $7.10 at $650.50 an ounce on the New York Mercantile Exchange.