Barrick Gold (TSX: ABX; NYSE: ABX) pioneered gold hedging more than two decades ago, but the company endured sharp criticism when the strategy became a liability, and management eventually closed out its fixed-price hedge book at a significant cost in 2009.
The pros and cons of hedging remain the subject of debate to this day, and the topic came up during a discussion at the recent Prospectors & Developers Association of Canada convention in Toronto, when a participant asked a panel of bankers whether they thought the practice was a useful tool for the industry.
Egizio Bianchini of BMO Capital Markets — who prefaced his remarks by pointing out that BMO has the smallest commodity desk of all the banks represented on the panel, making him “the least conflicted” to answer the question — responded with an emphatic yes.
“It’s absolutely insane to me why a developer without any cash flow doesn’t hedge,” he said. “It’s just logical. I would love to see all development companies hedge.”
“You want to make this industry investible? Especially the junior industry? Give me some predictability,” he said. “And if you want to give me some upside, go out and drill more reserves and give me the optionality of having more reserves.” Bianchini, vice-chair and co-head of BMO’s global metals and mining group, also said hedging was appropriate for producers.
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