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Investors dismayed as new Barrick chairman talks diversification

Barrick Gold Corporation Co-Chairman John Thornton speaks during a news conference in Toronto, December 4, 2013. REUTERS/Aaron Harris
Barrick Gold Corporation Co-Chairman John Thornton speaks during a news conference in Toronto, December 4, 2013. REUTERS/Aaron Harris

By Euan Rocha

TORONTO (Reuters) - Barrick Gold Corp investors have taken in stride news that the world's largest gold producer may consider hedging its gold exposure, but they are roundly panning its plan for more diversification into other commodities.

John Thornton, who was confirmed after markets closed on Wednesday as Barrick's next chairman, told reporters he would consider revisiting a hedging strategy for selling the company's output because of the volatility of gold prices.

He also said he thinks Barrick, which already has a copper sideline, is well placed to look more at copper and perhaps at other commodities, once it puts its recent troubles behind it.

That pronouncement stung some Barrick shareholders, many of whom are invested in the Toronto-based miner only because they see a bright future for the gold price.

"It's like saying to the market, once I recover from all the bad decisions I have made and paid back the mountains of debt I incurred doing it, I am going to go out and do it all over again, but not in the commodity I'm in right now," said John O'Connell, the head of wealth management firm Davis Rea Ltd.

Barrick's share price is stuck near 21-year lows, hurt by a drop in the price of gold and investor disappointment with governance and corporate missteps that include ballooning costs at its now mothballed Pascua-Lama gold project in the South American Andes and its pricey takeover of Africa-focused copper miner Equinox in 2011.

"We are distinctly positioned over the next decade or two, if we can execute, to take what's been built and not only extend it as the world's leading gold miner, but also to take a very serious look at copper, which we are in and possibly minerals beyond that too," Thornton said on Wednesday after Barrick announced a major boardroom shuffle.

Thornton's vision dovetails with that of Barrick's founder and long-time chairman, Peter Munk, who has faced bitter criticism for the C$7.3 billion ($6.9 billion) Equinox deal and other missteps.

Munk has long harbored an ambition to see Barrick become a big diversified miner in the mold of Rio Tinto Ltd or BHP Billiton Ltd .

Barrick said on Wednesday that Munk, 86, and two other long-term directors, will step down from the board this spring, when Thornton will take over as chairman. Barrick also nominated four new independent directors.

Thornton's remarks on diversification struck a sour note with Christopher Mancini, an analyst at the Gabelli Gold Fund, which owns about 2.86 million Barrick shares.

"The comments overall are disconcerting," he said. "I would say that Barrick has too many mines already. The company needs to get smaller and less complex, not more so."

Barrick declined to comment. Its shares fell 2 percent to C$16.39 on the Toronto Stock Exchange on Thursday as the price of gold slipped.

SPLIT ON HEDGING

Investors and analysts are split on hedging, which was popular in the 1990s, when prices were weak, but became taboo in the last decade as gold prices soared.

Gold companies typically hedge, or agree to sell gold at a future date at a fixed price, to help finance projects, or to protect against falling bullion prices. Back in 2009, however, Barrick paid a fortune to unwind its hedge book because it was losing potential revenue as the gold price rose.

Barrick issued equity and debt worth more than $5 billion to eliminate the gold hedges and booked more than $5 billion in charges.

Thornton said on Wednesday he would look seriously at hedging, given the sharp pullback in the price of gold. Spot gold is some 36 percent below its 2011 peak above $1,900 an ounce, and was at around $1,225 on Thursday.

"It seems that Mr. Thornton doesn't quite understand that the fundamental issue with hedging is that a company fixes its revenue in an industry where the cost base is extremely variable and largely unhedgeable," said Mancini, noting that his firm is invested in Barrick for its exposure to gold.

Others disagree. Barclays debt analyst Harry Mateer said he is encouraged that Barrick appears to be considering a hedging strategy again.

"We consider hedging to be a prudent financial strategy for at least a portion of a company's production," Mateer said in a note to clients.

"Given the proliferation of exchange-traded products that allow investors to have exposure to gold, we no longer think that gold equity investors are seeking full exposure to the underlying commodity price."

John Goldsmith, deputy head of equities at Montrusco Bolton Investments - which sold its entire position in Barrick after the Equinox deal - declined to say whether he would buy back into the stock if Barrick hedged. But he noted that the strategy has worked well for the oil and gas industry.

"Oil and gas companies do not take all their reserves and hedge all of their reserves into the future ad infinitum, they hedge a portion of this year's production to guarantee a certain amount of cash flow for next year's production program," he said

He said Barrick's previous hedging strategy backfired because the company hedged production for years in the future.

"I think the strategy makes a boatload of sense," he said.

($1=$1.06 Canadian)

(Additional reporting by Julie Gordon and Allison Martell; Editing by Janet Guttsman and Peter Galloway)

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