Let’s follow some Mark-to-Market math, useful to understand the painful squeeze on the gold cartel generally, which includes both investment bankers (holding COMEX positions) and mining firms in collusion. Based on a $993/oz spot gold price, Barrick would record a $5.6 billion liability on its balance sheet, to be recorded in 3Q2009 as a result of a change in accounting treatment for the contracts. At $1010/oz (current gold price), the liability is 1.7% greater, almost $5.7 billion. It recorded a slightly smaller but gigantic loss two years ago. One must ask how many decades of profits have been burned up by their hedge book strategy over the last several years??? Barrick intends to use $1.9 billion of the net proceeds to eliminate all of its 3 million ounce fixed priced gold contracts (sold forward at $370/oz) within the next 12 months and approximately $1.5 billion to eliminate a portion of its 6.5 million ounce floating spot price gold contracts. Further hedges remain, like a never-ending nightmare. Based on calculations, Barrick has estimated a cost of $569 per ounce to close the floating rate contracts. (That cost is higher now.) At that price, and based on the $3.5 billion equity raise, they should be able to close out approximately 2.6 million ounces of floating rate contracts. That should leave around 3.9 million ounce floating contracts after all the cash from the announced secondary issuance is drained. To close out the entire Barrick hedge book would call for an additional $2.2 billion. The company contradicts its own claim to cover its entire hedge book with a statement that they are willing to use use debt (corporate or commercial) to close out the remaining hedges if the cost of that debt was less than 5%. So more acid packs rest on the balance sheet. Thanks to Adam Graf at Dahlman Rose for his rundown on the math.

It is my fervent hope that Barrick Gold is pursued by expert arbitrageurs and is forced to relinquish control of its company and properties. Its eventual liquidation would herald the upcoming $2000 gold price, maybe $3000. The process might have begun with hordes of selling since the announcement to cover their hedge book. They probably just took the share price down to the secondary stock sale announced price. Maybe the market will remember their last ‘cover’ of their ‘entire’ hedge book. Notice the ABX stock is on a downtrend. The dilution of 10% is registered in the price move from 42 to 38. Barrick will still have exposure to at least 4 million ounces short, a severe burden on its shoulders. The stock is stuck in a uniquely strange pattern. The downtrend is attempting to turn upward gradually. Given the hedge book is not yet covered, their exposure remains, above and beyond their share dilution. A sudden run to $1100 gold would crimp their plans, and leave them with even more floating contracts after raised funds are used and spent. China certainly changed the landscape in the last couple weeks, ramping up the Financial Trade War. The gold price right away topped the elusive $1000 mark. Barrick executives might actually be motivated to cover gold shorts before the COMEX defaults and is threatened with a shutdown. The always perceptive Jesse of the Café Americain agrees with this potential motive.

The excessive hedging by Barrick has left the company hollowed out financially, unable to properly exploit even the deposits on its own properties. It should have raised money to develop mines, and thus exploit the rising gold price. Instead, it raises money to cover its errors in a disastrous strategy. This is precisely an example of what my analysis has called ‘Inelastic Supply’ that describes the phenomenon of a higher gold price resulting in less gold output. We see it in spades with Barrick, the posterboy in gold mining recklessness and incompetence.