(GATA News) Hedge books are blowing up & "How the [beep] could this happen?"
Subj: Reginald H. Howe - The Cambior Catastrophe - And Maybe A Way Out Of It
Date: 10/8/99 10:59:58 AM EST
From: LePatron@LeMetropoleCafe.com
To: dougak
Le Metropole members,
Reginald H. Howe has served commentry at the
Kiki Table entitled, "The Cambior Catastrophe,
And Maybe A Way Out Of It."
Harvard educated Reginald H. Howe has a better grasp
of what the gold market has been all about in
recent times than most anyone else.
The essays at his goldensextent.com website
are full of rich material. I highly recommend it.
"But in a sharply rising market, particularly one
suggestive of a short squeeze, volatility premiums can
shoot through the roof, which is what is happening now
in gold call options, both over-the-counter and
publicly traded. What is more, the mathematical
models (delta hedging, Black-Scholes, etc.) that
are designed to control risk tend to break down in
these circumstances due to liquidity constraints......
Several points emerge from this picture:
1) Both Cambior and its bankers face a serious
financial problem, and one that will grow a lot
worse should the gold price continue to rise.
2) If Cambior's hedge book is at all representative
of many others, as many well-informed observers
suspect, there is a far larger systemic problem,
and one that will grow exponentially with further
increases in the gold price.
Reginald H. Howe
www.goldensextant.com
October 7, 1999
THE CAMBIOR CATASTROPHE,
AND MAYBE A WAY OUT OF IT
Hedge books are blowing up. Ashanti and Cambior are the most visible...
...Cambior's press release of yesterday holds such unsettling implications
for the gold market that I cannot let it pass without comment....
Cambior is a medium-sized gold producer based in Montreal...
... its management is generally quite well-regarded in the mining community,
and its shares have heretofore frequently appeared in the reported holdings
of many gold mutual funds.....
... But the real killer is the call options.....
You may ask, "How the [fill in the blank] could this happen?"
There is a hint in the press release: "The counterparties to these
hedging contracts consist of international banks and financial
institutions, principally lenders in the Revolving Credit Facility."
And sure enough, the report for the second quarter reveals that Cambior
has a $250 million five-year Revolving Credit Facility with the first
scheduled repayment of $54 million due in 2001.
The use of put and call options was discussed in my commentary of Sept.
11, 1999, "Gold Banking and Mining Finance: Elements of Risk." For
mining companies, the hedge is really the purchase of the put option. In
the declining gold market of recent years, these purchases were
generally financed by writing (selling) call options, often in a ratio
of 2:1, since sale of two call options would typically finance purchase
of one put option.
Particularly in the negative atmosphere following the Bank of England's
announcement of its planned gold sales, there were many reports of
bullion bankers "suggesting" to gold mining companies the advisability
of additional puts to protect credit lines. For already strapped mining
companies, purchasing meaningful puts meant writing calls at strike
prices near or below $300/oz., an obviously risky strategy.
There is another problem with options that those not familiar with them.....
... Several points emerge from this picture:.....
... By extension, all paper gold must now be deemed suspect.....
Cambior's hedge book, c'est incroyable. J'ai peur de ce qui se passera.
Mais c'est un dommage aussi. Tout le monde sait que j'aime bien le
Quebec et les Quebecois.
It gives me no pleasure at all to write critically of Cambior,.....
...particularly since the problem it faces is not so much of its own
making as it is the work of powerful people bent on other agendas having
nothing to do with fair play, free markets, hard work, or any other
virtues for which Quebeckers are justly known. Indeed, it is to
Cambior's credit that management faced up to the problem and put out a
detailed, factual press release.
Free advice is worth what you pay for it. But were I directing Cambior's
affairs, I would have my lawyers hard at work. In particular, I would
ask them if the Lac Minerals/International Corona case -- a legendary
battle in the annals of Canadian mining -- might have application here.
That case, arising out of the famous Hemlo discovery, established that a
senior mining company in negotiations with a junior over a prospective
property owes a fiduciary duty to the junior not to take any undue or
improper advantage of the relationship.
Doesn't this principle suggest that an international bullion bank
dealing with a relatively small gold mining company owes it a fiduciary
duty of full disclosure of all material facts relating to a proposed
loan transaction and associated hedging?
If so, does it then follow that the bank, if it had any knowledge
thereof, must disclose any facts relating to the manipulation of the
gold market by itself or others?
My lawyers would probably tell me that the arguments could be made, but
that it would be hard to prove knowledge of manipulation.
Smiling like the Cheshire cat, I would then suggest they talk to Bill
Murphy at GATA...I would get ready to take off the gloves.
Copyright 1999 Le Metropole Cafe
All the best,
Bill Murphy, Chairman
Gold Anti Trust Action (GATA) gata.org
Le Patron, Le Metropole Cafe lemetropolecafe.com |
