Yesterday Fed Chairman Bernanke is reported to have said something to the effect that the ‘economy probably is in recovery, but for those without jobs and at risk of losing jobs recovery will be long and slow in a period when unemployment rates are likely to go up somewhat from here before leveling out and then declining’.  Aside from the operative word being ‘probably’, as I have said previously on this blog to an economist recovery is a technical term that means GDP is increasing not decreasing.  Aside from the fact that Government reported numbers are constantly being readjusted over time people act on those numbers as they are first reported much like piranhas group and devour cattle crossing an Amazon river.

Think of it in absolute numbers.  Suppose GDP is 100 units, but a serious economic downturn takes it down to 75.  It then increases to 76, a 1.3% increase over 75, but still a 24% decrease from 100.  Economists say ‘hurrah’, economic recovery is upon us, and the media picks up this mantra.  It is hardly likely such ‘good news’ is seen as such by Main Streeters.  I recommend you not get confused by ‘the facts’, and think for yourself what the absolute numbers mean.  To me, they mean a long protacted period of economic times in the U.S. that may not approach the economic buoyance of the 2003 – 2007 period in that country (measured by consumer spending power) for many years, if it ever does.

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There have been a glut of articles on Barrick’s +U.S$$4 billion equity raise announced early in the week.  This post references two of them.

First, in separate Press Releases on September 8 Barrick and Silver Wheaton announced a transaction pursuant to which Silver Wheaton acquired 25% of ‘life of mine’ silver production from Barrick’s Pascua-Lama project for U.S.$625 million.  You can find the Press Release on the Silver Wheaton Company Page on StockResearchPortal.com, along with a 2nd Press Release issued by Silver Wheaton that same day announcing a U.S.$250 million bought deal financing.  An article dated September 8 titled ‘Barrick Gold sells mines to Silver Wheaton’ provides more detail on the transaction with Barrick.  For those of you interesting in researching Silver Wheaton its stock price increased by Sept 11’s close by about 6.5% from its mid-point price on Sept 8.  At the same time its average daily trading volume was approximately 4.6 million shares in the 4 day period ended Sept 11, when its average daily volume for the 3 months ended September 11 has been (rounded) 1.6 million.  That said, the focus this past week has been far more on Barrick than on Silver Wheaton.

An article Thursday titled ‘Why Barrick reversed its gold-hedging strategy’ says the Barrick equity offering will dilute existing Barrick shareholders by over 12%.  The article can be read to in part imply that investor (and perhaps investment banker) pressure played an important role in Barrick raising this money to eliminate a large part of its hedge book.  Based on my many experiences advising Multi-Nationals and major Public and Private companies on valuation matters, for what it is worth here is my take on at least some of the things that may have contributed to the Barrick Board approving the Barrick equity offering – as well as the transaction with Silver Wheaton.  When making the following observations I want it clearly understood that I have not discussed any of this with Barrick Board members or employees.  I have known one of the Barrick Board members for over 35 years, and know him to be very sophisticated and to have a clear understanding of fiduciary responsibility.  I would be surprised if all members of Barrick’s Board do not share those same two attributes.  Things I think may have contributed to the Barrick Board’s decisions on both the Silver Wheaton deal and Barrick’s equity raise include:

•    first and by way of background, it is trite law that Directors of a company have a fiduciary responsibility to the stakeholders of that company and the company itself.  The company’s shareholders viewed as a group and individually are stakeholder(s), but they are only one of a number of stakeholders.  For those of you who are not familiar with the term ‘fiduciary responsibility’, in a ‘Director context’ it simply means that each Director of a company has an obligation at law to make objective decisions he/she believes are in the best balanced interest of the company and its stakeholders;

•    second, while to me it follows that while the Barrick Board undoubtedly would have been cognizant of the views of investors and those representing investors as they made the decision they did, pressure from such individuals and groups by itself would be more a catalyst to the discussion than it would be a fulcrum factor in the Board’s decision making;

•    third, it seems to me the Barrick Board would have addressed all the factors, business risks and opportunities known to it that it thought related to what has ended up being a very large and dilutive equity issue.  I think it virtually certain that one of these factors would have been the Barrick current and prospective share price.  However, other factors almost certainly would have included (or so I think) the Board’s collective view:

-  on the prospective price of gold over both the near and long term,

-  on market timing in the context of new equity that may have been available last week may or may not be available on the same terms (if at all) in the coming months and years depending on how the current volatile economic condition unfolds,

-  whether the elimination of its hedge book might contribute at some future date to a change in Barrick’s dividend rate, thereby perhaps then contributing to an increase in its fully diluted share price,

-  whether in the current economic environment eliminating its hedge book might result in an increase in its fully diluted share price which in turn might result in an opportunity to raise even further capital for acquisitions where the Board thought it might need to augment Barrick’s prospective ‘free cash flow’ to balance future ‘acquisition opportunities’ with ‘acquisition risks’.  I think my reference to the ‘current economic environment’ is important here given what I think will be increasing opportunities for well-funded Resource Sector acquirers going forward, and

-  that under any circumstance a higher prospective share price in the current economic environment will result in greater flexibility to take advantages of possible near-term or longer-term opportunities.

All in all, I would put some weight on investor and investment bankers views being a contributing catalyst to the Barrick Board electing to consider the equity raise it did.  That said, I would be very surprised if the Barrick Board didn’t balance all the information it had at the time it made its decision on gold price forecasts, prospective business opportunities known and currently unknown to it, and other things it thought relevant to its decision prior to making it.  In the end the Barrick Board must have concluded the equity raise and resultant share dilution on balance must have been in the best interests of Barrick and all Barrick’s stakeholders – that’s what good Boards do.

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An article today titled ‘In Deeper U.S. Trade Deficit, Good News for World’s Economy’ says “The U.S. trade deficit hit its highest level in six months in July as a record rise in imports outpaced a third straight increase in foreign demand for American products, according to government data released Thursday. Both gains provided more evidence that the worst recession since the 1930s is losing its grip on the global economy”.  Yesterday the U.S. Commerce Department reported that in July the U.S. trade deficit was $32 billion, much larger than the $27.4 billion economists had projected.  The trade deficit is a ‘net number’ determined by subtracting U.S. exports from U.S. imports.

Aside from my view that ‘one swallow doesn’t make a summer’ and that in any event the July U.S. trade deficit number is a meaningful litmus test on world economic recovery is a ‘stretch’ readers of this post may find some historic data useful.  The U.S. had neither a cumulative net trade deficit or surplus in 1971 when then President Nixon’s administration took the U.S. off the gold standard and the U.S.$ became the world’s reserve fiat currency.  28 years later (by 1999) the U.S. had accumulated an aggregate net trade deficit of just under $2 trillion.  Here’s where I think it gets really interesting.  By December 31, 2008, only 9 years after 1999, the U.S. cumulative net trade deficit stood at just over $7 trillion (3.5X what it was in 1999) and has continued to grow by between $25 – $30 billion each month since then.  You can see the build-up of these numbers by visiting StockResearchPortal.com, clicking on Economic Research in the Main Navigation Bar, and clicking on U.S. Trade Deficits near the bottom of the left Navigation Bar of the webpage you are then on.

From my perspective the U.S. through loss of manufacturing jobs after the year 2000 has escalated its dependence on its trading partners and that dependence increases each month.  Without question the U.S. is the #1 military power in the world, and currently continues to be the world’s largest individual country economy.  That said, I don’t think one has to look beyond the U.S. trade deficit accumulation and current position to see that we are well on our way to a ‘new world order’ – and one in which not all countries share the U.S.’s ideology.  Where this ultimately leads is anyone’s guess, but my guess is that it leads over time to continued weakening of the U.S. through ever more dependence on its trading partners – and to a much reduced standard of living for U.S. residents from their current average standard of living.

There is a second article that I recommend readers of this post take the time to read carefully.  Titled ‘Americans are getting poorer, and it’s going to get worse’ it reports “The early impact of the worst recession since the 1930s pushed median incomes down, forced millions more people into poverty and left more Americans without health care in 2008, according to new annual survey data from the U.S. Census Bureau” and for reasons spelled out in the article “the worst is yet to come”.  I have never understood why people broadly don’t observe the simple things that surround them, think about those things, and act accordingly.  Ask any person on the street in the U.S., Canada or any other developed country about the behavior of squirrels, and my guess is to a person they would know and say that squirrels don’t eat all the nuts they find in the fall – rather they store nuts away to enable them to survive the winter.  The average U.S. resident (and to a lesser degree Canadian resident) has eaten all the nuts available to them as they have found them – retaining no nuts for bad times.  One shameful conclusion that could be drawn from this is that the average citizen knows how squirrels behave and knows why they behave that way, but just maybe squirrels are smarter than the average citizen – come on, that can’t be true.

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An September 8 article titled ‘Barrick raises billions to cut hedges’ reports that Barrick Gold Corp, the world’s largest gold miner (production about 8 million ounces/year) is planning to largely eliminate its ‘gold hedge book’ by raising U.S.$3.45 billion through an equity offering led by RBC Dominion Securities, Morgan Stanley, JPMorgan and Scotia Capital.  On September 9 Barrick announced this amount was being increased to U.S.$3.5 billion.  The article sets out details of Barrick’s hedge contracts, and how Barrick plans to allocate the proceeds.  I find this an interesting move on Barrick’s part.  One has to believe that before deciding to proceed with this equity offering the Barrick Board sought and received the best advice money can buy with respect to the balance between the share dilution resulting from the transaction, and the effect on Barrick’s share price that may result from forecasted gold prices.  The article states:  “Barrick is a gold company that has forged its reputation on clever financial engineering more than a belief in metal prices”.   This equity offering does not strike me as falling into the category of a ‘financial engineering transaction’.  What does strikes me is that I think it likely Barrick’s Board and Management have concluded that on the ‘balance of probabilities’ the price of gold is more likely to increase than decrease from its current +/-U.S.$1,000 level.

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