Good For Barrick, Bad For Gold?

It made a bundle on falling prices-and made rivals crazy

Profits at most gold mining companies have dulled over the past two years as the metal's price slumped to two-decade lows. Not at Toronto-based Barrick Gold Corp., though. In 1998 it made a record $301 million, and in the first half of this year net income soared 20%, to $171 million. So what seeming magic is it working? Simply, it hedged: selling as much as a quarter of its reserves for delivery up to 36 months in the future. By betting correctly during gold's long slide, Barrick has at times pocketed $385 an ounce or more while competitors took in as little as $252 for their sales on the cash market.

The tactic was great for shareholders in Barrick, one of North America's leading gold producers--but lousy for the gold market, critics say. They contend that by dumping as much as 13 million oz. on the market for future deliveries at any one time, Barrick drove already weak gold prices down further. Worse, they say, Barrick's moves encouraged hedge funds and others to bet against gold, which depressed prices even more. Barrick acted in its shareholders' best interests, but "hedging by gold-mining companies has hurt the gold business," says Jean-Marie Eveillard, who manages the $20 million SoGen Gold Fund. Barrick spokespeople concede that the company's actions could have affected market psychology, but insist Barrick didn't flood the market.

VILIFIED. Indeed, some analysts figure that Barrick and the short-sellers did far less damage to the business than the world's central bankers. The fall in gold prices accelerated earlier this year because investors feared other European countries would follow Britain's and Switzerland's lead and sell off a sizable portion of their reserves. The Clinton Administration didn't help matters when it tried to push the International Monetary Fund to sell a hefty 10 million oz. of gold to raise cash to help heavily indebted nations.

Although he was regularly vilified in gold chat rooms on the Net, Barrick's veteran chairman, Peter Munk, 71, is unrepentant. He lobbied central bankers to reveal their plans for gold sales and urged the IMF to hold onto its reserves. By the end of September, the European banks had pledged to limit sales and their practice of lending gold to short-sellers for the next five years. The IMF backed away from its plan on Sept. 26, too. "We reinstated the fundamental stability and sanity to a market that seemed to have been suffering from a total lack of rationality," says Munk. "On that score, I'm very happy."

The return to sanity should add even more luster to Barrick. After the banks' decision, the price of spot gold soared, reaching $326 on Oct. 5. And since Barrick produces the metal at a lower cost than most other mining companies, its profit margins should widen further. Barrick has, for example, shut three high-cost mines in Utah and Nevada and plans to close two more in Chile. At the same time, it has developed cheaper supply sources, such as its Pierina Mine in northern Peru. In the first half of this year, Pierina yielded nearly 550,000 oz. at a cost of just $38 each. Barrick's single biggest operation, the Goldstrike Property in Nevada, turned out some 1 million oz.--54% of the company's total production--for a still-profitable $143 an ounce. "Barrick is by far the best-positioned gold company," says Morgan Stanley Dean Witter analyst Douglas M. Cohen.

For Munk, who knows what it's like to be poorly positioned, such sentiments must be heartening. The Hungarian-born entrepreneur, whose wealthy family barely escaped the Nazis by fleeing to Switzerland, arrived in Canada in 1948 almost penniless. He picked tobacco in Ontario before earning an electrical engineering degree at the University of Toronto at age 25. In the 1960s, he made and lost a fortune with Claritone Sound Corp., a pioneering hi-fi company that couldn't stay ahead of the competition. More recently, he has been devoting considerable time to TrizecHahn Corp., a successful real estate company that he salvaged from bankruptcy in 1994. Under Munk's leadership, it has grown to be a major player that now counts Chicago's Sears Tower among its properties. For a while, at least, Munk's gold holdings should shimmer just as brightly.