Hi rails99, On PTR, I am, like you, of several minds :0)
On gold and NEM, I am maximum BULLISH ...
Gold Bulls' Big Gamble
Bernard Condon, 07.01.03, 12:00 PM ET
forbes.com
A pair of gold investors who amassed $357 million over 19 years by calling the ups and downs of the metal plan to send a message later this week to gold bears: You're going to lose. If all goes well, they will make a sizable bet that gold will rise past even its current lofty price of $345 an ounce.
The bet by Seymour Schulich and Pierre Lassonde, the biggest individual shareholders of Newmont Mining (nyse: NEM - news - people ), comes in the form of a rather arcane deal that the Denver gold company is trying to strike with gold hedgers and bond investors to whom it owes money. Newmont has offered to buy out the IOUs at a price that means it will lose money should gold not pierce its recent trading range.
The offer, which will cost the company $219 million, expires July 3.
Gold has fallen 10% in five months. After a remarkable runup last year that broke a two-decade-long bear market, many investors think the metal has nowhere to go but down. Another reason to dump on the metal: the recent strengthening of the U.S. dollar and the lower than expected quarter-point cut in the federal funds rate last week.
Newmont doesn't share its predictions on gold prices with the public, so the deal offers rare insight. Lassonde, whom the company has confirmed is the brains behind the offer, is Newmont's president. Schulich is a director.
The two are no ordinary gold bulls. They had been down on the metal for most of the 18 years they ran their Toronto-based investment firm, called Franco-Nevada Mining. They protected themselves by insisting that the firm be paid back for its financial help with a cut from a mine's revenue, not profit. Thus the two would make money even if mines they funded ended up losing money. And many did as the price of gold fell. Their stake in the firm was at one point worth $235 million.
Last year the two did something unexpected. They sold Franco-Nevada to Newmont, which is largely unhedged and thus benefits when gold rises (see "Kings Of Royalty"). They thought the U.S. dollar was bound to fall, sending investors into gold. Short-sellers of the metal would get squeezed, they figured, sending prices up further.
They were right. Newmont shares have risen more than 50% in the past year, adding more than $100 million to their already sizable fortune. Shares of Barrick Gold (nyse: ABX - news - people ) and Placer Dome (nyse: PDG - news - people ), both heavily hedged, are basically unchanged from a year ago.
The latest deal reflects the pair's appetite for big gambles. It isn't Newmont that actually owes money to the gold hedgers and bond investors. It's Newmont's Yandal subsidiary, which owns three Australian mines. Yandal is on the brink of bankruptcy, in part because it promised to deliver gold to bullion banks at a price much below what the metal is trading at now. Not a problem if you can dig it all out of the ground. But Yandal promised more than it can actually mine itself, so it must now acquire gold on the open market.
This has created the curious situation of a gold company in a gold bull market stuck buying high and selling low until it runs out of money.
Newmont can simply walk away from Yandal since it's a legally separate corporation, but this would tarnish Newmont's reputation with hedgers. But what do Schulich and Lassonde care, since they're suddenly so bullish on gold and don't plan to hedge anymore? So Newmont has threatened to abandon Yandal if its offer of just 50 cents on the dollar for all the hedges and junk bonds is refused.
The 50-cent figure wasn't pulled out of thin air. In terms of Yandal's gold reserves, it means Newmont will be paying $135 per ounce to the hedgers and bond holders. It costs Newmont $215 per ounce to get the gold out of the ground. Add them together to get Newmont's total cost for keeping Yandal running: $350. If gold falls below this price, Newmont would be better off liquidating the subsidiary.
Investors representing 83% of junk bond debt and all but one hedger have accepted the deal. |
