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Gold/Mining/Energy : Barrick Gold (ABX)
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To: Ron Everest who wrote (1241)6/4/1999 11:52:00 PM
From: Exsrch  Read Replies (3) of 3558
 
Ron,

Let me commend you on your explanation. Your message will do alot to bring understanding to the "Premium Gold Sales" and dispel erroneous assumptions about the risks associated with ABX future earning.

There is one point I would add to your message:

- ABX has the option to cancel contracts (and pay a penalty); however, they also have the option to defer the CB/GB contract up to 10 years while paying the contractual interest rate.

The "So What" of that point is ABX can take full advantage of the rise in AU prices above US$385. The only penalty would be the interest to the CB/GB (this assumes the interest rate would not increase with AU prices. Your feedback would be appreciated the that point).

The interest penalty to CB/GB (w/ AU above US$385) would be insignificant to earning per share compared to NEM, PDG etc. because ABX is operationally far superior. Even with 12.5 MM onces sold forward they can pay the interest penalty and increase earning at a rate above their peer group (premium multiple?).

Having talked up the shiny side of the coin, let me discuss the other side (risks). We have to remember that ABX does not actually sell their gold above spot. They are like everyone else and they can get no more than what the market will bear. They sell above spot via two methods.

1. Accounting

2. Cantango

The explanation:

1. ABX borrows gold (enters contract) from CB via its own GB.

2. ABX sells gold at spot price.

3. ABX takes proceeds from the sale of gold at spot and invests the money in Money Markets (hope nothing with a higher beta).

4. The accumulated interest they earn (so far about 7.5% on average)is added (via accounting) to the original sale of the gold and viola you have average ounces sold at above spot. This accumulated interest is the "cantango". I believe this is recorded on their book when physical gold is returned to CB.

Ron, I like to talk about other things (re: ABX) but let me keep the reply to the subject you originally wrote about. If you would like to discuss ABX in real time let me know.

If anyone has comments or sees errors please respond and let me know. I look forward to our interaction to learn and hopefully make a better investment.

Cheers,

Excsrch.
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