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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