ABX Preview: Trimming the Hedges

The most important event for Barrick Gold (ABX - commentary - Trade Now) is that it is terminating most of its hedging program, so that its production will be fully exposed to gold prices going forward. Barrick Gold will take a large nonrecurring charge in the third quarter as a result of this action. It will also issue $1.25 billion of new debt to finance the buy back of its hedges.

Apart from this charge, the consensus has the company earning about 45 cents a share on $2.1 billion of sales in the third quarter, and $1.80 per share on $8.1 billion of sales for all of 2009. Earnings should increase to at least $2.00 a share in 2010 on higher prices and stabilizing volumes and costs.

Although Canadian, the company reports in U.S. dollars. One reason is that Barrick has more U.S. than Canadian production. Elsewhere in the Americas, Barrick is developing new mines in the Dominican Republic, Argentina and Chile. Outside of the Americas, Barrick is looking to expand its presence in Tanzania, in East Africa, where it already has a foothold.

I tend to use Barrick stock in a pair trade with Newmont Mining (NEM - commentary - Trade Now) because we like gold and gold stocks generally. Right now, Barrick appears to be the cheaper of the two relative to historical patterns, which is why our current mix is 70%/30%.

On the conference call, I would be listening most of all for the status of various development projects. I would also want to learn the degree of the company's stabilizing the downward trend in both volumes and margins (the latter due to rising costs) at existing operations. Finally, I'd be happy to hear what the company has to say about gold or oil prices and the general outlook for commodities.

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At the time of publication, Au was long ABX and NEM, although holdings can change at any time.

Thomas P. Au, CFA, is a principal with R. W. Wentworth, a financial services firm in New York City. Earlier he was an emerging markets portfolio manager for the investment arm of Cigna Corp. and an analyst with Unifund, S.A. of Switzerland and Value Line. He graduated cum laude with a B.A. in Economics and History from Yale University and an M.B.A. in Finance from New York University. Au is the author of A Modern Approach to Graham and Dodd Investing, a book for times of economic uncertainty. Au appreciates your feedback; click here to send him an email.