Those examples are the great "company builder mines". But there aren't that many of those, and the dearth of exploration has insured that not many more are in the pipeline. Most (in fact the majority) of production is expensive and companies going that route are overly dependent on excessive hedging. Gold Fields Thompson said it best, "I don't think hedging is appropriate at the level and at the scale it has developed in the mining industry", and, "to sell ounces in the ground at 270-280 an ounce when the cost of replacement is 350 is just insane".
That's the point of my last post. Selling three or four years of future production and writing naked calls on mines that produce at $250 to $275 cash cost is blatantly bad business (and I think failed) practice. These businesses might as well walk away and turn over the key to the bankers. And my point is that when the next wave of margin calls hits, that's exactly what will happen. Further, investors who own such companies will ironically be wiped out in a gold bull market.
And yes, I think such producers are trapped, given that they don't have the money to cover or meet the calls. The creditors will own the mines. Further, unless gold trades above $400, those creditors will not only not take delivery on the sold contracts, but will lose even more money if they try their hand at mining. It will be this process of "creative destruction" that will restore equilibrium to the gold mining business. |
