Barrick's main hedging, forward selling of gold borrowed indirectly from central banks using spot deferred contracts written with bullion banks, is a source of much grief for the radical gold bugs as it has played a small role in depressing the POG,...but if the central banks hadn't hoarded gold in the first place, this type of hedging couldn't exist.
Your intermediate producer sounds like NGX. Their spot deferred contracts may be different from Barricks in a couple of ways.
Barrick can negotiate with the bullion banks from a position of great strength with an AA rated balance sheet, and high cash flows from multiple minesites, and their contract positions are covered by multiples of current gold reserves, and contracts expiring on an annual basis are covered by multiples of annual gold production. This allows them to negotiate contracts of long duration at very low interest rates with the bullion banks.
I would guess that NGX could not negotiate the same duration of contracts, and likely would have to pay a higher interest rate to borrow the gold. I would also guess that the banks would not loan much more than a year of gold production to NGX either, given the production comes from one minesite.
Additionally, Barrick takes the proceeds of their forward gold sales, and invests them in a bond portfolio with the bullion bank they borrowed the gold from in the first place. So the bullion bank has double security for the loan,...first the bond principle from the proceeds of the gold sale, and second an equal amount of gold reserves in the ground to cover the gold loan. You would have to confirm that NGX does exactly the same thing.
To my knowledge, the only gold producer that can get as favorable forward leasing contracts as Barrick's is Anglogold, thanks to their large reserves, high annual production and excellent balance sheet and cashflow.
Forward leasing is really just another loan as far as the banks are concerned,.. very similar to mortgages on houses, loans to businesses etc. The banks main concerns will be security of the principle, and ability of the borrower to pay back the loan. The more collateral a miner has, and the higher the income, the better the loan terms one can get. This is very similar to any loan in the business world,...GM can get a below prime loan whereas Russet's Used Wrecks will pay prime plus 10% (2 x principle per month at Vinnie's loans who takes knee caps as collateral)
The bank will make its profits off the difference between what it costs them to borrow the money (in this case gold) and the interest rate they charge the borrower and whatever transaction fees etc., they can charge for handling the transfers and bond portfolios. The bank makes money, the gold producer gets a nearly risk free floor price for their gold, and the world continues to turn. |
