Texas Hedges of Barrick,...AKA "when does a Bird in the hand not equal 2 Birds in the bush" in the authors imaginary world of the Gold nut propagandist
ASSumptions by the author,....
Gold prices will double and hold there or continue to increase.
This ignores the long run effects of supply and demand should the POG rise to $600. It assumes little new gold in the ground will be found in the future, and significant new production will not come on stream, and the increasing gold above ground does not increase annual gold production from scrap. It also assumes demand will not decrease with price, an assumption proven false in every country I know of using Gold Council numbers.
Total forward selling of gold should be limited to one year's production,...if not, this is deemed not to be a true hedge.
This is the central argument to the story, and is an extremely weak argument. Barrick wants an average price for its production that exceeds its production expenses. Any year in the future, Barrick need only deliver about 1.2 million gold oz into the hedges per year to close them out in 15 years. The other 80% of a 6 million oz annual production commands the spot price. [(.2*6*$345 + .8*6*$600)/6 = $549 per oz average price]
The average is significantly above cash costs for Barrick of under $200, but somehow the author demands that Barrick will go bankrupt under such a scenario.
Barrick will not deliver to the gold loans for 15 years, but will continue to roll them over until it runs out of current gold reserves. (but then he turns around and contradicts this by saying Barrick will be margin called before then
There is nothing stopping Barrick from delivering more gold from the ground into their hedges.
Barrick will not be able to increase reserves beyond current levels ever.
This is another stupid assumption, as Barrick continues to replace or increase their reserves almost every year. As the price of gold increases, this will become easier to do from internal mine sources, as well as joint ventures and acquisitions as higher cost resources become more and more profitable and become reserves and more profits are generated to increase exploration and drilling.
Gold that won't be mined for one year, is not to be counted in calculations of covered gold.
This one year crap is the central argument of the whole essay. He must somehow destroy the fact that Barrick has all their loans of gold covered by gold in the ground, and has it covered five times by those reserves at current prices, so he spews out several silly arguments why gold that won't be mined this year should be ignored. He ignores the cost structure of existing Barrick mines, ignores replacement and increasing reserves, ignores the effect higher POG has on the profitability of Barrick and the ability of Barrick to buy new reserves with increased profits.
Barrick has unlimited real liability, even though all they have done is presold gold in the ground.
The only liability they have, is to return the gold oz they have forward sold. They can do this in small amounts over 15 years or less if they want. 18 million oz of gold is not unlimited liability.
He insists Barrick can be called on their presold gold loans through some sort of postulated margin call, even though he admits he has no knowledge that this exists, and Barrick says it does not. He just ASSumes that no one can borrow gold for any longer than one year.
Here he is calling Barrick management liars with no proof. He is also once again choosing to ignore the 5 times cover of gold reserves Barrick has, and the $5.5 billion dollars in the hedge fund in bonds that could serve as collateral to the gold loans.
He assumes Barrick only looks at gold price charts for 15 years to prove gold always declines in value, although this thread has examined the chart for over one hundred years, and the sideways to downwards drift for the POG is obvious for the large majority of years in that longer term.
Here he shoots off his mouth, apparently without looking at long term gold charts. He is wrong, but so are most of his assumptions and conclusions. Looking at the long term gold charts, Barrick would have been profitable and acquired higher average gold prices over spot for most year's annual production in the last one hundred years, if Barrick could have used spot deferred contracts throughout, with current production, reserve replacement, and profitabilities (revenue vs cost structures).
He ASSumes Barrick will have a margin call, even though it has a $5.5 billion portfolio of cash backing the gold, plus 5 oz of gold reserves in the ground, for each one presold.
Again he calls Barrick liars with no proof.
He assumes that Barrick will only close out each individual borrowed gold oz at a profit.
This is not necessary in a rising gold environment. The average gold price being above average costs is all that is necessary for a increasing profit above current levels. An increasing gold price assures an increasing profit for Barrick given current cost structures, both current and predicted.
He assumes that proceeds from spot defered contracts invested with its bank counterparties are not bonds,..."The company will no longer invest part of the proceeds from the spot deferred contracts in the bond market, but “will instead leave all proceeds invested with its bank counterparties”."
In fact Barrick was refering to closing out corporate bonds investments,...but we don't want facts to get in the way of a good story do we?
He assumes Barrick has already received a margin call, and now all proceeds from deferred gold sales are escrowed.
Two more assumptions with no proof.
He compares agricultural commodities to gold in the ground, and claims gold in the ground is no collateral for the gold loans of Barrick, by assuming the company will go bankrupt before digging it up.
I've addressed this above. To compare an agricultural commodity, that has yet to be grown in the same risk category as reserves of gold in the ground is silly. Then he ignores Barricks cost structures by somehow claiming they will go bankrupt before they can dig it up. Of course this is true for any company, any gold company too, hedged or unhedged.
He assumes that by virtue of its short position Barrick assumes vested interest in a lower and falling gold price, which clashes with its main mission to sell newly mined gold at a higher and rising price.
Again, most of their reserves and annual production are unhedged in future years. This argument makes no sense.
For the last half of the essay there is the necessary propaganda that gold is a currency, it has special value, the U.S. dollar will fall and gold will rise from the ashes, that Barrick is an evil doer for pre selling gold, that there is a great conspiracy to keep gold down,...all same old gold fanatic stuff that is basically irrelevant because over 80% of Barricks gold in the ground is unhedged, and as the gold price goes up, Barricks reserves increase in value, and increase in size in nearly proportional manner. The increasing income they make with the higher POG can also be used to increase frequency of acquisitions, drilling and investment in more capital to increase production.
Conclusion:
The authors statements and assumptions defy reality and assume that some things about Barrick remain static (reserves and production), Barrick lies about their hedges(margin calls, contract duration), Barrick will not close out forward sales until they run out of reserves, Gold will only increase in price irregardless of supply and demand,....on and on,...all the Gold fanatic arguments and assumptions that for the most part have been dredged up and recycled for 30+ years,....during part of which time Barrick has emerged from the dust to become one of the biggest, lowest cost, innovative, and conservatively managed gold miners in history.
Now again the company's view of the world,...without all the bs from gold fanatics posing as ivory tower nitwits ,...
Barrick Gold Corp ABX
Shares issued 537,813,627 May 8 close $32.75
Thu 9 May 2002 In the News
The Globe and Mail reports in its Thursday, May 9, edition that Barrick
Gold says it plans to simplify its gold hedging strategy and make it more
conservative. The Globe's Allan Robinson writes that Barrick says it will
no longer invest cash from the forward sale of gold in a corporate bond
portfolio, but will instead invest it with major financial institutions at
a slightly lower rate of interest. The hedge portfolio is currently worth
$5.5-billion of which about $758-million is in fixed-income corporate bonds (all figures U.S.). Barrick plans to reduce its call option position by at
least 50 per cent or three million ounces by the end of the year. Its spot
deferred hedge position of 18 million ounces or 22 per cent of reserves
will stay unchanged. Since 1996, the hedge program has generated
$1.7-billion in additional revenue above the spot price of gold. Barrick
says it expects to sell half of its gold production at the spot price and
half at its hedge price of $365 an ounce. Gold traded Wednesday at $308.20,
down $3.40. ?Every $25 increase in the average spot gold price will increase
Barrick's earnings by about $70-million or 13 cents a share.
Barrick has eliminated further writing of call options.
Barrick has made 1.6 Billion more hedging their gold since 1996 than a similar unhedged gold producer for the same amount,...that's a lot of capex for new mines.
Every $25 increase in the average spot gold price will increase Barrick's earnings by about $70-million or 13 cents a share.
Gold is currently trading at about $316, but Barrick is averaging $365 per oz on their hedged gold. Selling at spot is pulling their average down. |
