AN IMPORTANT WARNING
For all Junior GOLD Exploration & Developing Companies
And
Junior Producers with Production from Joint Ventures with Majors
[THIS WARNING PERTAINS TO HEDGEBOOKS GONE BAD, METHINKS]
[AN UNHEDGED GOLD MINER IS NOT AT THE RISK DESCRIBED]
Your Production and Properties may be at RISK
from an previously unconsidered factor WITH SOLUTION
by James Sinclair
September 25, 2002
Dear Colleagues:
Please entertain the following as potentially correct.
To establish for you, that I have the right to comment on a potential financial problem you have and may not be aware of, allow me to give you my background. My career in minerals is based on a long and successful career in finance. I started my career in the late 1950s as an over-the-counter market maker for a NYSE firm, Straus, Blosser and McDowell. Later, I became a general partner of the NYSE firm of Vilas & Hickey and President of their German subsidiary. During that period I was the largest consumer of South African Gold shares in the world. Upon founding my own firm, The Sinclair Group, I was considered to be one of the world’s major influences on gold during the '70s. I established a commodity-clearing firm in Chicago where 47 members on the floor wore my colors. The Sinclair Group umbrella developed a Minor Metals (industrial metals & material market maker) dealership in London, a derivative trading group in metals, and various offices in Canada, Switzerland and the US.
When an article was published in The Wall Street Journal in 1980 saying “James Sinclair-Bull takes off his Horns,” I began the liquidation of my firms, which were vertically integrated around precious metals. During that period I was appointed by the direction of Chairman Paul Volcker, then Chairman of the Federal Reserve, to advise the Hunt Family on liquidation of their silver position, as a criteria for the rescue loan arranged by the Federal Reserve. Thereafter, I established James Sinclair Financial Research SARL in Luxembourg, which was successfully sold to the First Nordic Banking Corporation seven years later. I undertook the Chairmanship of Sutton Resources LTD, whose finances between 1989 until 1994 were personally attended to by my family and later by certain close associates and myself. Since then, I personally financed a private company, Tanzanian American Development, which accumulated over 50 mineral concessions in the Archean Tanzanian Greenstone Gold Belt. These properties were explored over 4000 square kilometers using state of the art geophysics applied by Fugro who is the largest such company in the world. My drilling was done by Stanley Drilling, a most respected company. This was accomplished without any investors or partners. After Tanzam completed 12 gold concession transactions with Barrick Gold, I merged my company into a public company by the name of Tan Range Exploration which now has 14 transactions with Barrick Gold and a total 80 properties primarily in the same location.
I have told you what my background is for only one reason. I hope that you will grant to me that my 43 successful years of experience in markets, metals and finance give me the authority to warn you of an impending danger to your company and therefore to your shareholders, which I know many of you are not cognizant of.
You may have placed your percentage of your Joint Venture GOLD Property as collateral against a gold derivative, unknowingly.
As we both know, no lender funds a new gold project without 100% of the project collateralized to the project development loan. Those of the industry selecting to do percentage JV deals with the major (98% of all Juniors) must place the junior’s percentage of the deal, therefore the junior’s percentage of the property, therefore the junior’s percentage of the production as liable, collateralized to the production financing loan package.
The advent of gold derivative hedging and gold leasing did not arrive by the genius of any producer. It came on the scene as product of the Non-Recourse Project Development Loan structured by financial organizations. Non-recourse financing has taken the major producers by storm.
Here is your problem that you must investigate. Since juniors must place their property interest up as collateral to the project development loan package, you probably have, unknown to yourselves, put your property up as collateral to the entire loan package which includes the derivative taken by the major as required in the loan to obtain non-recourse project funding. What I am telling you is that you have responsibility for your percentage of the gold derivative that the major assumed as part of the non-recourse loan to build the infrastructure of your project and production share.
Now, you must ask yourself, How would liability come down, assuming a failure of the gold derivative structural counterparty risk as a result of gold closing above $330 and $354?
If JPM has dealt the gold derivative via JPM London and Goldman Sachs has via J. Aron London, the parent is isolated from the trade debts of the subsidiary. That means the rich parent is not automatically required to pay the derivative debts of their subsidiary in most cases. The major gold producer now on your and their behalf own a DERIVATIVE without any INSULATION as it pertains to your or their percentage of the property and/or production. In plain English, those that sold the derivative package are insulated against the derivative and the junior plus the major are totally exposed to the derivative as it pertain to your property dealt on a percentage basis to the major gold producer.
YOU AND YOUR STOCKHOLDERS ARE, most probably, HANGING OUT TO DRY. Those that sold the derivative have financially isolated themselves, in all probability, from a failure of the derivative, itself.
Assuming that the derivative fails and a money demand or specific performance demand occurs it will fall upon the project property, which stands totally exposed via your commitment on the loan package. You will receive an unexpected, enormous cash call from the major that in all probability you have no way to meet. The property that you are so proud of will no longer be yours or your stockholders, but rather will belong to the major or to the banking organization that made the project loan.
Here is how you determine if you have this potentially terminal problem.
Ask the major if the project financing is Non-Recourse to the major, and therefore to you, outside of the property itself. If they say yes and they are running a hedge book, you have a problem.
Here is how you solve the problem.
Clearly stockholders do not want any junior or major producer to be hedging when four of the five basic fundamental building blocks for a long-term bull market are in place. The 5th and key building block, which is, I believe, entering an established top in 30-year and 10-year government bonds, should begin to enter the gold equation a positive factor by the end of November of 2002 (according to cyclical analysis). When that occurs, go to your major gold producer JV partner and do whatever you have to do to convince them to go recourse on the loan. This will allow them to close that hedge (required to be on as part of the project financing) that was assumed to establish your project loan. Drop your percentage share if you have to, but get yourself and your stockholders out of the way of a potential total disaster to your company.
Sincerely yours,
James E. Sinclair
Chairman
Tan Range Exploration |
