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Gold/Mining/Energy : Gold Price Monitor
GDXJ 128.07+0.7%Jan 16 4:00 PM EST
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To: The Vet who wrote (4106)12/10/1997 2:30:00 PM
From: Jaakko  Read Replies (1) of 116877
 
Closing out a forward gold sale position means the mining company goes out and in essence buys gold on the SPOT market and delivers same in satisfaction of the forward contract, thus getting itself out of the obligation to deliver PHYSICAL GOLD at a FUTURE date as per the forward contract in question. In the current market environment, the mining company would stand to gain a substantial amount of immediate cash as a result of the closing out of the forward position (having sold the gold FORWARD at a higher price when the forward contract was entered into). After closing out the forward position the mining company is now totally free to pursue its business the way it chooses:

For example, it can choose to do one of the following things:

1) Continue production, albeit at a loss. The cash reserve it receiced will act as a cushion until the POG is high enough for the operations to be profitable. Advantage: The company can take full advantage of future price increases in the POG. Avoids costly shut down and reopening costs of the mine, and loss of employment of miners. This solution is good obviously as long as the cash reserve lasts.

2) Close down the mine (or scale down production, or mine high grade ore only) and preserve the cash reserve totally or partially. In essence, the company is waiting for a better POG before going into full production. Advantage: The cash reserve will last longer, but there might be costly shut down and reopening costs.

3) Go out of business and distribute the cash reserve together with the proceeds of net asset sales to the shareholders. This would imply a rather dim outlook of the future POG by the shareholders!

Jaakko
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