Placer's hedging strategy criticised by James "Mr Gold" Sinclair
Posted: 2000/11/6 04:03 PM GMT+2
Jay Taylor, CEO
Placer Dome
Suite 1600
1055 Dunsmuir Street
Vancouver, BC V7X 1P1
Dear Mr. Taylor:
In response to your pronouncement that hedging is here to stay, my response is "You may well be correct, but your actions and your announcement are very likely to decimate your primary industry." I have spent my life focused on the gold industry and currently have personally financed a Tanzanian mineral investment company. I am disgusted that the Chief Operating Officers of the companies that share this industry boast of their financial strategy, which I believe is actually killing their primary business. It is my opinion that the examination of your own activities would reveal that you are your own worst enemy.
Academically one cannot argue that hedging your assets against a fall in price makes intuitive sense. However the practical message that is sent to the market place when these positions are entered is that gold producers believe that the market for their product will continue to decline. What investor will place their money in an industry whose management openly displays concern regarding the direction of the market for their product.
I believe that there are two inherent reasons why hedging is dangerous in this industry. Hedging is most effectively accomplished when both sides of the transactions are equally weighted of the attributes of time, price and liquidity. Hedging in-ground reserves fails miserably when matched to the timeframe and liquidity attributes of derivatives. On the demand-supply of the equation, the market implication of the hedge is a sale transaction without an offsetting buy, compounding the negative message of the hedge.
Incidentally, have you considered the full message that you are sharing with your investors when you announce that you made $800,000,000 by "hedging" 15% of your reserves? Does this statement not imply that the value of Placer Dome's reserves have fallen in value by a magnitude greater that six times of this gain?
Sincerely,
James Sinclair
Chief Executive Officer
Tanzanian American Develoment Company
m1.mny.co.za |
