Meet the Counterparties that Hedged Barrick's Gold

09-14-2009 • Seeking Alpha

But think about the way these contracts work. Many of these hedges are meant to be in place for years. Royal Bank of Canada (RY), which is on the other side of some of those Barrick contracts, didn’t make a long-term, one-way bet on gold when it guaranteed a price to Barrick. The bank simply used the derivative market to create a position that offset its exposure to Barrick, and took a fee for its serves. In other words, counterparties hedged the hedges they struck with Barrick. So as Barrick collapses hedges over the next year, and takes a $5.6-billion accounting charge, the mining company’s counterparties will not book similar-sized gains. They will simply wind down their own bullion hedges. In the extremely liquid gold futures market, this should play out quietly and with minimal market impact. Barrick listed a number of its hedging counterparties because they are also the investment banks underwriting its $4-billion stock sale. The move is meant to make any potential conflict clear to investors. For the same reason, the gold company also listed lenders involved in the equity financing. However, Barrick and the dealers said being a counterparty or a creditor didn’t win an investment house a role in this financing, which will likely pay the Street $140-million in fees. The Barrick prospectus says: The decision to distribute the common shares, including the determination of the terms of the offering, was made through negotiations between Barrick and the underwriters. Neither the lender affiliates nor the counterparties had any involvement in such decision or determination. Barrick said the hedging counterparties that also had a role in the stock sale include the four lead underwriters: RBC Dominion Securities - a unit of Royal Bank of Canada - Morgan Stanley (MS), J.P. Morgan Securities (JPM) and Scotia Capital. The mining company also hedged its gold production with BNP Paribas (BNPQY.PK), Citigroup (C), Goldman Sachs & Co (GS)., UBS Securities (UBS) and Barclays Capital (BCS).