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Pascua-Lama gold hedge worries analysts

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Pascua-Lama gold hedge worries analysts

Sections  > Gold & Silver

Pascua-Lama gold hedge worries analysts
By: By Dorothy Kosich

Posted: '18-FEB-05 04:00' GMT Mineweb 1997-2004

RENO--( Barrick's decision to earmark 6.5 million ounces of its existing hedge book to the Pascua- Lama project generated controversy among the analysts attending Thursday's telephone conference call.

The announcement came on the heels of Barrick's report that it had reduced its hedgebook to 2 million in 2004.

In their year-end report for 2004, Barrick notes that the company expects to put in place third-party financing of up to $750 million of the expect $1.4 billion to $1.5 billion construction cost of Pascua Lama. In support of this financing, the company allocated 7.5 million ounces of existing fixed-price gold sales contracts specifically to Pascua-Lama.

The mark-to-market value as of December 31, 2004, of these contracts is negative $966 million at a future estimated average realized selling price of $372/oz. The expected delivery dates for these contracts will be from 2009-2017. These contracts represent 35% of the 17.6 million ounce of gold reserves at Pascua-Lama.

No silver hedging contracts will be used from the estimated 643 million ounces of silver contained in the gold reserves. Barrick CEO and President Greg Wilkins said the silver reserves have been determined at a silver price of $5.50/oz.

Meanwhile, Barrick will separately maintain its corporate gold sales contracts, which as of December 31, 2004, totaled 7 million ounces. The total represents one year of future gold production and 10% of proven and probable reserves without Pascua-Lama. As of December 31, the mark-to-market value was negative $949 million at an average estimated realized selling price in 2014 of $426/oz.

Barrick Executive Vice President and CFO Jamie Sokalsky said the company has anticipated a 2005 cash cost guidance of $220 to $230 an ounce. In addition $2 billion in Australian dollars and $1 billion in Canadian dollar are being hedged, he added.

Meanwhile, Sokalsky explained that his company will look for opportunities to reduce its hedge books, but refused to respond to repeated requests by analysts for guidance as to whether this would be judged according to gold prices and a schedule.


Barrick's reserves as of December 31, 2004, stand at 89.1 million ounces of which more than half were created through drilling rather than higher gold prices. Wilkins explained that this included an overall increase of 8.6 million ounces before contained gold production of 5.5 million ounces at an average gold price of $375/ounce. Reserves at development projects were up 14% during 2004 including Veladero, up 16 percent at 12.8 million ounces and Lagunas Norte, up 28% to 9.1 million ounces.

Barrick's flagship Goldstrike mine in Nevada added an additional 2.3 million ounces of reserve. Exploration Executive Vice President Alex Davidson declared to analysts Thursday that "Goldstrike remains our number one exploration target" this year. Wilkins explained that its reserves are relatively insensitive to a $24/oz change in the gold price.

Four new mines are under construction including Tulawak, Lagunas Norte, Veladero, and Cowal. The first gold pour at Tulawaka in Tanzania is anticipated this quarter, according to Wilkins. Production is forecast at 90,000 ounces annually for the first three years at an average cost of $180/oz. The first gold pour at Lagunas Norte in Peru is scheduled during the third quarter of this year with anticipated production of 800,000 ounces at an average cash cost of $155/oz for the first three years. The first gold pour at Velardo in Argentina is scheduled during the fourth quarter of this year with production forecast at 700,000 at about $200/oz for the first full three years.

Despite the fact that the "mining industry is booming in Australia," Wilkins said the first gold pour for Cowal is anticipated for the first quarter of 2006. He estimated that in total $100 billion is being expended for mining projects in Australia. Meanwhile, he added, there is competition for equipment, consumables, and manpower. As a result, the capex for Cowal has been revised to $305 million.

Meanwhile, Wilkins said Barrick remains very interested in Russia.

Estimated overall Barrick production this year is forecast at 5.4 million to 5.5 million ounces of gold , a 10% increase over 2004, at an estimated total cash cost of $220-230/oz. An improvement in production, cash costs, operating cash flow and earnings are expected during the second half of this year as Lagunas Norte and Veladero come on line.

A 40% increase in growth is planned by 2007 with up to 7 million ounces of production at slightly above $200/oz.


Wilkins declared that Barrick currently holds claim to the "strongest balance sheet in the gold mining industry" with a year-end cash position of $1.4 billion as of December 31, 2004. The company has secured $1 billion for development including $750 million through the sale of 10 and 30-year debt securities and $250 million for Veladero project financing.

For 2004, net income was $248 million ($0.46 per share) compared to a net income of $200 million for 2003. For the year 2004, the company produced 4.96 million ounces of gold at total cash costs of $212/oz, down from 5.51 million ounces at total cash costs of $189/oz for 2003.

For the fourth-quarter 2004 net income was $156 million or 29-cents per share compared to $77 million or $0.14 per share for the same quarter of 2003. Barrick's four-quarter 2004 earnings include a $141 million tax credit and a $15 million after-tax reversal, $48 million in other deferred tax credits, a $24 million after-tax gain on asset sales and a $6 million after-tax non-hedge derivative gain. These were partially offset by $95 million in after-tax impairment charges primarily involving Eskay Creek and exploration properties purchased during the Arequipa acquisition.


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