Hi John:
Thanx for pointing something out to me ,..... I hadn't noticed an error ...... and corrected it for you.
stockhouse.ca
As noted, I had the intention of posting "non-operating and derivative losses", sorry for the ommission.
Like I said I'm no accountant, I presume you are. Got some questions for you regarding accounting practices for hedging. Some of it seems like a lot of voodoo math to me, perhaps you could clear it up for me.
Hypothetical Assumptions
Say a company (XYZ) writes some forward sales contracts on some of their gold production. Let's also assume that these forward sales are written at the beginning of a hypothetical quarter and delivered by quarter-end. At the time, the price of gold is US$425. XYZ is in start-up mode and wants to guarantee some cash flow on its gold production of which they are pulling 20,000 ounces per quarter out of the ground for US$400/oz cash cost to start with. They know cash costs will decrease in the coming months. They get 15,000 ounces forward sold at $450, giving them a guaranteed $750,000 in cash flow. And XYZ also left 5,000 ounces at spot prices.
Three scenarios .
Scenario 1.
Price of gold stays flat. $425 for the whole period of time until the ounces are delivered. I'm assuming then, that the company has to book a derivative gain in their financial statement of $375,000 ($25 per ounce on those 15,000 ounces).
They report cash costs of $400/oz and, (for simplicity sake, cuz I'm just a simple guy) cash flow of $875,000.
($50 x 15,000 + $25 x 5000 =$875,000)
Scenario 2.
Price of gold drops. POOF ! $375 overnight and stays there for the duration of time until company XYZ delivers the gold into the contracts. What wizards ! How foresightful of them ! LOL . So now I assume XYZ will have to book a derivative gain of $1,122,000 ($75 per ounce on those 15,000 ounces). They now report cash flow (same $400 cash cost/oz) of $625,000 because they lost $25 an ounce on the 5,000 ounce they sold at spot.
( $50 x 15,000 + (-$25 x 5000) = $625,000 )
Scenario 3.
Price of gold sky rockets overnight Shazzam ! $500 per ounce and stay there for the entire quarter. Market starts going nuts, buyers come flying into gold producers, good times for all,.... except for the hedgers right? Oh oh, XYZ is hedging.
So now I have to assmue that XYZ will have to book a derivative loss of $750,000 (-$50 x 15,000). They now report cash flow of (again same $400/oz cash cost) $1,250,000.
( $50 x 15,000 + $100 x 5000 = $1,250,000
Now a couple of questions for you. First off, are the results of my assumptions correct ?
Secondly, if you've locked in $50 an ounce in cash flow regardless of the market price, you still have $50/oz cash flow on your hedged sales no matter what happens with the porice of gold, right?
Thirdly, if you've limited yourself to that $50/ounce, is it really a actual loss or gain if gold prices rise or fall, or some ephemeral loss that only has to be noted in the financial statements for disclosure purposes for investors ?
LOL .... Let's extrapolate a little here,.... so if I, as simple guy Tad, were to lock in profits from my investment in XYZ bcause they got their mining operation up and running successfully and I sold a small chunk of maybe 10,000 shares for a $1.00 gain, only to watch the stock run up another dollar, can I then book a $1.00 derivative loss of potential capital gains with Mr. Taxman in Ottawa or Washington ? Or would Mr. Taxman consider my reported potential losses the amorphous rantings of some simple lunatic ?
;-) |
