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UPDATE 2-Barrick boosts equity offering, shares slide

Published 09/09/2009, 12:08 PM
Updated 09/09/2009, 12:12 PM

* Equity offering climbs to as much as $4 bln

* Shares drop 4.1 pct percent on dilution

* Company plans to eliminate fixed-price gold hedges (Adds details, analyst comments; in U.S. dollars unless noted)

By Cameron French

TORONTO, Sept 9 (Reuters) - Barrick Gold shares fell more than 4 percent on Wednesday, as investors reacted to the dilutive impact of a planned equity offering that could be worth as much as $4 billion.

Barrick, in a move that shows its faith that gold will continue to rise, announced an equity sale of at least $3 billion late on Tuesday, to be used to eliminate all of its fixed-price gold hedges and a portion of its floating hedges.

On Wednesday morning the world's top gold miner boosted the offering amount to at least $3.5 billion, or as much as $4 billion if an overallotment is exercised, citing strong investor demand.

Buying back the hedges -- which will result in a $5.6 billion charge to third-quarter earnings -- should remove a major overhang on the company's shares, as investors have long called for Barrick to completely exit its hedge book.

During times of weak prices, gold miners often sell a portion of their future production to protect, or hedge, against the possibility that prices will fall.

When prices rise, as they have done since 2001, the company suffers because value of the future production they've sold does not increase with the gold price.

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Barrick will spend $1.9 billion to eliminate its entire fixed-price position of 3 million ounces -- on which the company essentially loses money every time gold rises -- and will pay $1 billion to buy back a portion of its floating-price position.

Jennings Research analyst Ron Coll called the move positive, both in terms of the company's ability to fully benefit from rising gold prices and in terms of what it suggests about Barrick's own expectations for the metal.

"It is a signal that the industry's largest producer does not want to be caught out in what it views as a fundamentally and inflationary driven increasing gold price environment," he said in a note.

He maintained a C$50 target on the shares, despite the dilutive impact of the offering, which could raise Barrick's share count by as much as 12.5 percent.

STOCK PRICE TUMBLES

Investors, however, put pressure on the stock following a delayed open on the Toronto Stock Exchange, selling it down C$1.75 to C$40.70.

The price of gold

Blackmont Capital's Richard Gray cut his target on Barrick stock to C$48.50 from C$49.00, but said the move was a major positive for both the company and the entire gold market.

"From an overall market standpoint, the buyback of the 3 million ounces in the market should have a positive impact, but just as important is the monumental signal by the world's largest gold company that it believes gold prices are poised to increase further," he said in a note.

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"We believe this move by Barrick will help to sustain gold prices above $1,000 an ounce over the next 6-12 months."

The share offering is being led by a syndicate of underwriters, headed by RBC Capital markets, Morgan Stanley, J.P. Morgan Securities, and Scotia Capital.

($1=$1.08 Canadian) (Reporting by Cameron French; editing by Rob Wilson)

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