Barrick Gold (ABX) Message Board

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Gold/Mining/Energy : Barrick Gold (ABX)

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To: russet who wrote (2520)	5/7/2002 6:49:28 AM
From: nickel61	Read Replies (2) of 3558

I think the key difference here is that you take the position that the meaningful number to compare Barrick's hedge book to is the total reserves and I would say that it should be compared to the annual production. You want to spread the impact of the hedges out over 15 years when you consider their impact and say that it is not significant. This is the same assertion that the Barrick management has made repeatedly. What I am saying is that I think their hedges are best compared to the actual gold they can produce in any of the next several years. This is the main difference. Is it not? I understand that you feel that reserves can be made to grow quickly if the price of gold goes up since the incentive will be there to drill additional holes to prove up resources and make them into reserves. I agree they can and will do that. This is not always so easy as you might know. Gold is not equally spaced in any deposit and the adding of reserves that are economic can be tricky, but there is no sense arguing about that since ever Barricks geologists would not know how much they could add. Where we differ is the perception that the market will have for the situation. You think that the 18 million ouces that are sold forward will seem increasingly small when compared to the reserves that Barrick has and especially when those reserves can be made to increase from additional proving up drilling. Isn't that correct? This is where I think maybe I can add some value to the discussion. The stock market values future cash flow streams, and if the cash flow that can be derived from gold sales is not free to rise with a rising price of gold(assuming that gold continues to rise, a big assumption I grant you) Barrick will have to come to grips with the hedge book. What I mean by that is they will have to sell 18 million ounces at the average price they stated $344/ounce and that will be rapidly discounted by the market since the cost and the revenue will be immediately known. SO you say it will not be significant having 18 million ounces presold, well the market has and will look at that cashflow as having been already tied up or guranteed if you will. The value of which is a simple calculation of a discounting of the net present value of that cash flow stream. The remaining ounces of PRODUCTION that Barrick is able to bring to market will also be estimated by the marketplace and a discounted net present value will be done on that stream up cash flow. If these ounces are not already locked in in price then the known costs for producing that ore will be the basis and the spot sale price will give you the cash flow that you will discount. It is the nature of discounting any long series of future cash flow streams that the value of amounts far in the future are worth on a net present value basis less and less the further into the future you go. So it becomes critical to have your big profits close in or they are deminished by the discounting factor and also by the uncertainty that is implicit in any projection that involves going out ten or fifteen years. The bottom line problem then that we all might be able to agree on with Barrick is that the 18 million ounces of already sold gold production needs to be covered or delivered from a limited amount of current production and in order to keep it's stock valuation up most of the frozen already sold ounces will have to be recognized as soon as possible to allow for the future production to be able to produce and deliver the most high profit ounces so that the market can be able to value this into the stock. So unlike what you assume will happen that Barrick mangement will try to push those already hedged ounces back into the maximum 15 year delivery period like they claim, I think they will try and deliver themselves out of the situation as soon as possible or become vulnerable to a takeover by another gold company as they watch their stock sink on a relative basis as their future profit "potential" is already factored in. So the question for Barrick management will be if there is a continual rise in the US dollar gold price how much of our current production can I dedicate to covering or delivering into my current hedges in order to bring enough future production of unhedged ounces into the close in investment horizon. A company that has 15 million ounces of gold already sold forward at an average price of $344/ounce will be very vulnerable in 2004 if the spot gold price is $500/ounce. Which would only be where gold was on average over most of the eighties. Market price will discount the hedged gold one way or the other. If Barrick mangement thinks they can minimize the effect by increasing the reserves they are being silly. The stock market will only care about close in production (three to five years) when they value their stock. If they think somehow being able to spread it out over fifteen years is a positive they don't understand how the market price of their stock works as a discounting mechanism for the net present valuing of future income streams..they would be effectively sterilizing the profit potential of their future. The fact that the mangement of Barrick are not shareholders of their own stock seems to confirm that they are well aware of this fact. The strategy that they have followed was a convenient one for many of their banker friends and happened to coincide with the interests of the US economic interests during the period, not to mention every speculating hedge fund running a gold carry trade, but now the game is over and gold is seeking it's normal level. THE market will discount the already sold gold ounces at a very low value since it is already known and gold is fast approaching that level, the futher out in the future they push those 18 million shares the more they will cloud the investment future for the stock. The only real question is can they cover the hedges now before the price of gold goes to $500/ounce? And if so can they do that at a profit? IF not then their only hope is to continue to believe that gold can not possibly go that high. Which seems to underly your own arguement Russet. IF you do not believe that it can then even your gold juniors will not do much in the future.

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