Gary, et al,
This story from today's WSJ may be of interest to Gold Fund Investors:
October 21, 1999
Gold Mines' Share Values
Are Obscured by Hedges
By NEIL BEHRMANN
Staff Reporter of THE WALL STREET JOURNAL
LONDON -- Gold-mining companies must become more transparent about their derivatives exposure if they want their shares to be more attractive to investors, mining-fund managers say.
"U.S. investors are beginning to buy gold funds again, and there's a trickle of money into their European counterparts," says Kjeld Thygerson, a director of Lion Re source Management, which advises the $100 million (92.2 million euros) Midas Fund in the U.S. But fund managers and other investors are encountering a difficult stock-picking problem, he says. If gold prices remain above $300 an ounce and surge ahead in the new year, several gold-mining corporations could be exposed on their derivatives positions, he fears.
Virtually all gold mines in the U.S., Canada, South Africa, Australia and elsewhere have hedged against potential gold-price declines by using futures, options and complex derivatives schemes to sell future gold production at a specified price, says Geoffrey Campbell, a fund manager at the London-based $152 million Mercury Gold and General Fund. Now that gold isn't a one-way downward bet anymore, mining companies are encountering losses on their derivatives positions, he says.
Need for Clarity "We need far more clarity," Mr. Thygerson says. "When mines say that they've hedged gold at, say, $300 or $350, what do they mean? Is that gold's spot price or its futures price? How big is the book and what is the hedging policy?" The scale of the problem is huge, since at least 90 million ounces, valued at $28 billion in late September and equivalent to more than a year's production, is hedged, Mr. Thygerson estimates.
Illustrating the problems, the Mercury fund had invested in Ashanti Goldfields Co. of Ghana on the grounds that it was a solid gold mine that would benefit from rising production and gold prices. Instead, the stock plunged to a 12-month low of $3 on Oct. 6 from a peak of $10.69 in January after 17 bank creditors claimed $270 million in margin deposits to partially cover gold-sale derivative liabilities of $570 million, brokers say. The stock closed up 62.5 cents to $4.75 in composite trading Wednesday on the New York Stock Exchange on unconfirmed reports of financial backing by a Saudi investor.
But the weak performance compares with soaring stock prices of gold mines that either were unhedged or only held a small proportion of derivatives relative to production, Mr. Campbell of Mercury says. These stocks, he says, include Goldfields of South Africa, Harmony Gold Mining Co. in South Africa, and Homestake Mining Co. in the U.S.
Cambior Inc., a Canadian company, also disclosed that its hedge positions were far in excess of annual production and several other companies are at risk, analysts believe.
Disclosure Essential
"The best solution is that the global gold-mining industry must become transparent -- truly upfront -- about its hedging transactions and procedures," says Frank Lucas, managing director of Loeb Aron & Co., London-based consultants and mining-finance specialists. A large proportion of derivatives transactions aren't disclosed on balance sheets, he says, and company reports only hint about the potential liabilities.
Now that gold isn't a surely bearish play and could conceivably rise toward $350 or even $400 an ounce over the next 12 months, gold bars and coins are preferable to gold stocks, Mr. Lucas believes. The next safest gold bet would be an investment in a mine that either doesn't use the derivatives market or transparently explains its hedging policy, he says. Mines must state clearly how much profit is attributable to shareholders at gold prices ranging between $250 and $400, Mr. Lucas believes. Only then will investors know whether they are truly investing in a vehicle that will benefit from a rising gold price, he says.
"We are noticing that many mines are unwinding hedge positions," says Roger Chaplin, London-based head of research at T. Hoare Canaccord, a niche resource and emerging-market-securities firm. It is extremely difficult to value the mines, since they are trading derivatives continuously and losses and potential gains on derivatives positions vary with fluctuations in the gold price.
To be sure, there are two sides to the hedging coin. Hedging kept many a mine alive during the long bear market lasting from gold's January 1980 peak of $850 an ounce to September's bottom at $255 an ounce, he says.
But it must be done prudently, and stockholders have the right to know the mine's policy and exposure, he maintains. |
