(GATA News) ...focus attention on big hedgers like Barrick Gold is WORKING.
Subj: Gillian O'Conner, The Financial Times, Second thoughts over derivatives
Date: 12/15/99 6:12:51 PM EST
From: LePatron@LeMetropoleCafe.com
To: dougak
Le Metropole members,
The following article says it all in my
book. I will have more on this soon, but
GATA's efforts to focus attention on the big
hedgers like Barrick Gold is WORKING.
Not only has GATA influenced private investors
to sell Barrick (see below), but it had some
influence on one of its former 15 biggest
institutional shareholders that is no more.
Ms. O'Conner's article is right on the money.
With more press and shareholder awareness on
this issue, the Barricks of the world will
eventually have to cover and that will drive
up the gold price.
It makes no sense to own their stock anymore unless they do cover.
Second thoughts over derivatives
Gillian O'Conner
Financial Times
December 15, 1999
Hedging has become controversial once more.
For the past few years an increasing number
of gold miners have relied on their portfolios
of derivatives not only to protect them against
the falling metal price but also to provide
supplemental profits.
The hedging frenzy peaked in the first half
of this year, when the bullion price sank to
just above $250 an ounce and raised the
spectre of profitless production or mass redundancies.
But this left many companies vulnerable to
the price's sudden about turn in late
September. Ashanti, Ghana's pride,
notoriously racked up enormous paper losses
on its portfolio, and teetered on the brink
of default, because its banking counterparties
has the right to call for substantial cash
deposits which the company could not afford.
International investors were understandably
flabbergasted at the seeming paradox. When
gold goes down, miner's suffering are
understandable. When the price goes up,
it must surely be good news.
But the public anguish of Ashanti and the
Canadian Cambior showed that this is not
necessarily so.
And worries that hedge problems might be
lurking elsewhere mean that the FT Gold Mines
index has risen only slightly more than the
gold price since midsummer. This is highly unusual.
Traditionally gold shares are bought as a
geared play on gold itself, and exaggerate
its movements in both directions.
Jo Foster, of US investment managers Van Eck
Associates, speaks for many when he says: "I
cannot overstate my disappointment. We get
a rally in the gold price and the result is
two nearly bankrupt companies."
In the UK, Mercury, a long-term opponent of
hedging, headed a recent letter to unitholders
in its Gold and General Fund "Alongside every
hedge there runs a ditch." Graham Birch,
manager, said that in recent weeks he had
been "astonished to hear gold company
executives declare that hedging 30-40 per
cent of reserves and production is a low
level of revenue protection. They also
cling to the idea that derivative contracts
with 10-15 year lives are attractive."
At Mercury, he added, "we are not prepared
to mandate companies to pre-sell vast
proportions of the ore reserve at low prices."
As a consequence Mr. Birch expects to have
"near permanent big holdings in stocks such
as Harmony and Gold Fields." Harmony has
never hedged. Gold Fields has publicly
recanted and closed out virtually the whole
of its hedge book.
Fringe US pro-gold action group GATA
(The Gold Anti-Trust Action Committee) has
been encouraging private investors to sell
companies which hedge, such as Barrick,
and buy those which do not, such as Gold Fields.
If such an attitude spreads and deepens,
companies may find themselves forced to
abandon hedging in defense of their share prices.
At the acceptable end of the spectrum come
the ordinary forward sales required by bankers
before they put up money for a new mine
development. Even Gold Fields still has some
forwards in place in relation to its
Tarkwa project in Ghana.
At the unacceptable end come some of the
exotics which exploded in their buyers'
faces in October: "escalating ounce" calls,
where the number of ounces the miner could
be asked to deliver rose with the gold price;
Parisians, where the price at which it could
be asked to sell fell as the market rose.
Exotics were always a minor part of the market.
What about the large area in between the two
extremes? This is where the argument will
be focused next year.
But it is not just about miners who are having
second thoughts about hedging. Bankers are
having second thoughts, too.
Most bullion banks are said to be reviewing
their credit and margin requirements, and some
banks for which bullion trading is a minor
activity could even discreetly leave the
field to their rivals. For both reasons
hedging habits are set to change.
For new readers, the above mention of GATA is as follows.
Bill Murphy, Chairman, Gold Anti Trust Action (GATA) gata.org
Also, GATA related articles can be obtained at the pay for view site.
Bill Murphy, Le Patron, Le Metropole Cafe lemetropolecafe.com |
