Date: Tue Nov 16 2004 11:46
trotsky (skinny) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
i see you're very worried, deep down, that Barrick might go broke ( you assert that they 'won't go broke' almost every day, so you must harbor some fear with regards to the possibility ) .
naturally you wonder 'how could they possibly go broke'? i can provide an answer.
there are two sides to a rising gold price from a miners PoV. on the one hand, the higher price boosts revenues. on the other, it stands to reason that production costs will also rise ( for instance, from '68 to '80, the oz. gold rose from $35 to $850, but the cost of producing it went from $20 to $280, on average ) .
now let's assume gold goes to $1,000 as you predict ( btw., i didn't know you were so bullish. change of heart? ) . miner A sees his production costs go from $260/oz. to $600/oz. - this leaves a healthy margin of $400/oz., so the rise in costs would not be seen as a very worrisome development.
miner B however, has sold forward 10 million oz. at $350 - and now must produce gold at $600, for a negative margin of $250/oz.
and that is how Barrick, in theory, could go broke ( i say in theory because i'd expect the bankers to force them into buying back the hedge book long before that happens ) .
it is not the rising gold price per se that is the danger - it is the associated rise in production costs. so your worries are well founded.
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