Wednesday, September 9, 2009
Barrick Makes Bold Move, Moly Drops
It is 5:49 AM, have a cup and note that today is "nine-nine-nine", I don't know what this portends but it happens only once!
A faithful reader alerted the ole Colonel to a bold move made by Barrick yesterday. I appreciate this, many eyes make a better report. Barrick announced a plan to eliminate all of their gold hedge contracts within a year. Here are the key links:
Barrick Announces Plan to Eliminate Gold Hedges; Launches $3 Billion Public Equity Offering (Barrick Website, 9/08/09)
Barrick Gold to Sell $3 Billion in Stock, Buy Back Hedges (CNBC, 9/08/09)
They are offering $3 billion in stock to buy back both fixed priced contracts and a portion of their spot price gold contracts. Why is this important? In their words:
"Barrick has made this strategic decision to gain full leverage to the gold price on all future production due to:
• an increasingly positive outlook on the gold price. The Company expects global monetary and fiscal reflation will be necessary for years to come, resulting in an increased risk of higher inflation and a future negative impact on the value of global currencies; and
• continuing robust gold supply/demand fundamentals.
In addition, Barrick believes that the Gold Hedges and the Floating Contracts were adversely impacting the Company's appeal to the broader investment community and hence, its share price performance."
This will no doubt cause some volatility in Barrick's share price (ABX) and I've just noticed that trading has been halted on the Toronto and New York exchanges. Now that's what I call a whooper-dooper press release!
This offer is called a "dilution" because the present value of the company will be spread over more shares. The hope for investors is that future value without hedges will increase with rising gold prices so that the net affect will be positive for everyone.
Moves like this cause considerable discussion by the talking heads. There are least two camps so far. The first sees this news as yet another example of gold's expected rise beyond $1000 to higher prices and a positive for gold miners; the opposing view is that Barrick was pushed into this decision by shareholders, that they were one of the last big gold miners to do so (see note 1 below) and it marks a near term top for both gold and miners. The latter view is based on the old "sell the news, buy the rumor" logic in markets. Confused? We won't know the answer for awhile, ABX is frozen at yesterday's close of $39.30. Newmont is up this morning and gold is hovering just slightly below $1000 on the London exchange.
While we wait for that kettle to boil, I'm a little concerned about the recent fall in molybdenum prices. Please notice that I've turned one of the Eureka Outlook Dashboard lights to yellow this morning since moly closed below $16.50 yesterday to settle at $15.83.
I don't the reason for this and it hasn't affected General Moly (GMO) share price which steadily chugs closer to $3. The Report will sort out whether this is weakening demand or new supply in the next few weeks. There is one more troubling sign, however, that may be related to the price decline. In the past 3-months South Korean steel producer, POSCO, has lead both ArcelorMittal and Nucor in performance. These are the three steelmakers that the Report tracks on a daily basis. POSCO is important since they own a 20% share in our Mt. Hope Project. In the last month, POSCO has fallen behind the other two and the S&P 500:
S&P 500 up 1.8%
ArcelorMittal (MT) up 3.2%
Nucoe (NUE) down 3.5%
POSCO (PKX) down 5.1%
Since China is POSCO's biggest customer it is not unreasonable to wonder if something is weakening in the China recovery story. The Colonel would feel a whole lot better if copper broke $3 which would support the sustained Asian rebound argument. Too early to tell buckaroos but everything is connected these days. Stay tuned.
OK. Barrick resumed trading at 10:15 AM (EDT) and is presently only down a bit over 3% for the day. Salman Partners has just raised Barrick's price target (for the next 12 months) to $C48 from $C44.75. How's that for real time reporting! I'm hanging onto my Barrick stock pardner.
Enough talk, let's walk the walk:
CAUTION: 4-WD ON, Off-Road Market Conditions Ahead
Yellow light on for declining molybdenum price (less than magic number: $16.50)
Yellow light on for possible adverse legislation (mercury emissions)
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
Oil is up $0.50 in early trading to $71.60 (October contract); Gold is up $0.4 to $1000.2 (December contract, most active); Silver is up $0.060 to $16.520 (December contract); Copper is up $0.0125 to $2.9435 (December contract); Molybdenum drops to $15.83.
The DOW is up 25.24 points to 9522.58; the S&P 500, up 4.07 points to 1029.46. The miners are mixed:
Barrick (ABX) $37.87 down 3.64%
Newmont (NEM) $45.93 up 0.50%
General Moly (Eureka Moly, LLC) (GMO) $2.89 up 1.40%
Freeport McMoran (FCX) $67.66 down 0.50% (a bellwether mining stock spanning gold, copper & molybdenum)
Steel stocks are up, (a "tell" for General Moly):
Nucor (NUE) $45.61 up 0.48% - domestic steel manufacturing
ArcelorMittal (MT) $38.07 up 1.71% - global steel producer
POSCO (PKX) $95.46 up 1.68% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is up 0.28% to $1,160,280.19(what is this?).
Headline Photograph by Mariana Titus
Note 1 - AngloGold Ashanti now sticks out as the last big miner with a significant hedge book.