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Gold/Mining/Energy : Barrick Gold (ABX) -- Ignore unavailable to you. Want to Upgrade?

To: Exsrch who wrote (1281)	8/3/1999 8:23:00 PM
From: Daniel Chisholm	Read Replies (3) \| Respond to of 3558

Also there is misunderstanding about how the hedge works for ABX. I believe many who trade are under the assumption that ABX shorts gold; therefore, the traders assume ABX is exposed to a liability when gold price increases. IMO, ABX's hedge program is just dressed-up shorting, disguised a bit perhaps because some people seem to be offended by shorting. I don't think there's anything wrong with that, and I do know that there are certain details of their program (terms, conditions, dates) that might make more sense for them than an outright simple short sale, but in the big picture Barrick is shorting gold. When I read ABX's web page description of their hedging program, it looked to me to be a relatively simple program dressed up to look be a sophisticated razzle-dazzle "can't lose no matter what happens" program. They seemed to make a big deal about their "spot deferred" contracts, but to me it just looked like some special flavor of a forward agreement (with the option of of extending the settlement date somewhat), plus a physical short sale of gold (i.e., go and borrow real physical gold and sell it today for cash). There's nothing wrong with semi-exotic derivatives or with shorting, IMHO, but neither is there any magic to it. The fact is that if the price of gold rises above the point where ABX would desire to make delivery on the originally scheduled date and they choose to defer delivery, they are incurring an opportunity cost of sorts. They have a liability (they owe X ounces of gold which they have already sold for cash, which they must deliver within a certain timeframe (sometime between the original maturity date and that date plus the maximum permissible extension). There are both risks and benefits to their position. If the price of gold were to exceed $400 for the next twenty years (i.e., even beyond their "extension date", they would eventually have a real loss in closing out their spot deferred contracts). It just strikes me as misleading to somehow treat their hedging program as some sort of magic elixir that creates wealth out of thin air for them, and which will continue to do so no matter what happens to the price of gold. There are risks involved with it, and even though these might be sensible, appropriate and manageable risks, it doesn't change the fact that their hedging program has created certain risks, some intentional and desired (which might partially offset other risks in there business -- i.e., the whole point of hedging!), and some undesired The reason I originally read about Barrick's hedging program might interest you. I thought that perhaps Barrick might be a good undiscovered short candidate, if their hedge position was large enough (i.e., a successful hedge program might be masking, on an unsustainable basis, an uneconomic gold mining company). It turned out that while large, the size of their hedging was conservative enough that the "neat case" I had imagined as a possibility turned out to not exist. - Daniel