From gold-eagle Robert Chapman
GOLD
Part - 3
We have to go somewhere we haven't been before. We started writing
about markets in 1967, seven years after becoming involved in
world financial markets. Never did we think our sometimes lonely
road would lead to where we think it's now headed. In the late
1970s the Hunt brothers attempted to corner the silver market.
They almost made it happen. In 1869 Jim Fisk attempted to corner
the gold market. He was unsuccessful, but he like the Hunts,
brought on recession and depression. Recession between 1980 and
1983 and depression and financial panic between 1870 and 1874. In
1869 gold sold for $162.00 an ounce. In those days ranch hands
made $10.00 a month plus board and keep. Today they make $3,000.00
plus board and keep. It's obvious that if gold was worth $162 in
1869 and is only worth $300 today, after all the years of
inflation, deflation and financial debauchery, something is
dramatically wrong. If you extend today's real gold value you
could end up with a price between $3,000 and $8,500 an ounce. All
this is informative, but let's get to where we are going. After
seeing Goldman Sachs reportedly purchasing 500,000 ounces of gold
and Merrill Lynch making large purchases, prior to the central
bank announcement, which are totally out of character, we suspect
something bigger and more sinister is about.
As we look back we should have known gold was being accumulated by
the elitists. Bush, Mulrooney and Margaret Thatcher's husband,
Dennis, are on Barrick's board. They wouldn't have been on there
unless something big was in the making. Barrick is very close with
Hollinger and Conrad Black. Both Monk of Barrick and Black are
very close with Britain's Royal Family. Over the past five years
central banks have been selling 500 to 1,000 tons of gold a year,
which was purchased by elitist's and their institutions. Barrick
received first right of refusal to mine Bre-X through the good
offices of their puppet Suharto. Before it was discovered to be a
hoax it was supposed to be the largest gold mine in the world.
After the debacle gold prices headed lower. Barrick, et al, had to
know down the line that gold was headed higher eventually. The
sales previously at bargain basement prices continued to
deliberately keep gold prices depressed and in a last effort to
place more gold, that belonged to British citizens, in the hands
of these elitists they drove prices even lower. All this when all
central banks knew of the effort to stop official sales and
leasing at least 4 to 6 months ago. Knowing this, how could or why
would the Bank of England be selling their gold? It has to be a
give away. We think now that there will be an effort at these
still low prices by the elitists to purchase as much gold as
possible to create a corner on the market. This is not fantasy,
but a very real possibility. If we are right prices over $1,000 an
ounce won't be for fetched. This move could also be signaling the
collapse of the financial system and all the dangers it entails.
The joint venture of Placer Dome and Western Areas, despite a
higher gold price, has resulted in 2,500 miners being laid off.
Placer has again officially repeated they will not, anytime soon,
reopen development of the Las Cristinas property in Venezuela. We
are sure this is not going to go down well with the government,
which has included it in their financial projections.
As the short squeeze goes on, that is shorts, producer forward
sales and option sales, derivatives, leasers trying to cover, and
bullion banks who are worried to death that some of their leasers
will go under, the word in the pits is that the FED has already
guaranteed gold to Comex buyers. What buyers we don't know, and
for whom we can only guess. It could be other central banks. There
is no liquidity in the market. Goldman's option trader was fired.
Some mining companies may have over hedged and may be over the
abyss. Some of these parties, which we'll collectively call
shorts, have buy orders between $280-$300., a price zone we may
never see again! The only event we can see that would drive prices
back down is major bullion sales by central banks, which they have
stated they won't do. We have heard from several sources that
producers' sales have come to an almost complete halt.
The Crystallex Board of Directors have been back and forth to
Venezuela in five of the last six weeks at the request of the
government. It could be they are looking at or negotiating
purchase or leasing of other properties. We think a resolution of
the Las Cristinas situation is coming. The company came out with
the second consecutive quarter of profitability and growth,
increased production, improved efficiencies and a successful hedge
program combined to generate record levels of revenue and net
income in the second quarter ended June 30th. Six month earnings
were $.07 per share. If KRY ends up with LC 4 & 6, the stock will
certainly trade higher. We have no financial arrangements with
this company.
The gold market will remain uneasy for sometime to come just based
on the damage miners' hedge books have suffered during the recent
rally. The first declared victim is Cambior, which announced it
had hedge 2.7 million ounces at an average price of $318 an ounce.
They will pursue discussions with their counter parties concerning
the management of the situation of its hedge book.
Another heavy hedger is being handed its head, Ashanti Goldfields.
A net hedge of 10 million ounces has backfired spectacularly
leaving the company exposed to the tune of $570 million at a gold
price of $325. an ounce. Lonmin, 32% shareholder, has bid to buy
Ashanti out.
Among the sophisticated it's thought that the FED had held off on
raising interest rates to protect prominent institutions still
enmeshed in large losses from short gold positions. We think the
idea is well founded. The next rate hike by the FED and the ECB
should be early next year, if necessary. The FED 1/4% and the ECB
1/2%.
Dealers caught in the crossfire are Goldman Sachs $105 million,
Societe General $82 million, Credit Suisse First Boston $62
million, UBS $61 million, AIG $32 million and Chase Manhattan $25
million. This has forced Ashanti into merger talks with Lonmin, a
UK mining group.
As we warned in the last release don't buy Newmont until we can
see how much damage has been done. Newmont's stock has since
fallen several points as has Barrick Gold. This trap central banks
have set is the culmination of 15 years of gold mining companies
being the antithesis of what they should be. Instead of shutting
mines down due to lower prices, they hi graded them and sold
forward selling off their most valuable ore assets just so they
could keep themselves in fat salaries and directors' fees.
Investors should have been throwing them out of their positions,
but they didn't. Forward contracts and options are now burying
these mining companies and their investors. Let the lawsuits
begin. These forwards and options are now major liabilities. All
those poor investors that bought major gold stocks are getting
screwed for not finding out the companies' hedge position. Barrick
has sold forward 13.3 million ounces of gold at an average price
of $385 an ounce through 2001. If the gold price reaches those
levels, and there is a good chance it will, then Barrick won't
make much money. As Riley used to say, what a revolting
development this turned out to be.
Here are a few companies, that as far as we know, have either low
or no forward positions. We warn you, that if you want to purchase
these issues, that you personally call the company to double check
our research. We are here to try to help, but we don't have all
the answers, just most of them. Those with no hedge positions that
we know are: Battle Mountain, Buenaventura, Freeport MacMoRan,
Harmony, Agnico-Eagle and Goldcorp. Those with some leverage:
Homestake - position unknown, Kinross 12%, Anglogold 11%, Durban
Deep 5%, Gold Fields 2%, Western Areas 2%, Glamis - position
unknown, Meridian 11%, Kidston 13%, Iamgold 5% and Randgold 5%.
Gold hedging by producers is not surprising. Bema has hedged for
2.3 years, but at the same level as Barrick, $385. an ounce. If
prices are higher they'll be losers. Even if companies' forward
sales and put options to cover come out even the mines will have
made no money. We wrote a long article about this in 1992.
Approximate hedged positions are as follows: Barrick 3.9 years, or
26% of reserves; Cambior 4.3 years, or 52%; Echo Bay 2.5 years, or
23%, Kinross 0.9 years, or 12%; Placer Dome 2 years, or 19%; Bema
2.3 years, or 14%; Eldorado 2.8 years, or 28%; Meridian 3.8 years,
or 11%; Teck 2.5 years, or 33%; Ashanti 7.4 years, or 49%;
Randfontein 1.6 years, or 20%. Australia is unbelievable, Acacia
4.7 years, or 73%; Delta 2.3%, or 47%; Goldfields 4.4 years, or
54%; Lihir 3.9 years, or 21%; Newcrest 9.5 years, or 81%; Normandy
7 years, or 91%; Sons of Gwalia 8.9 years, or 113%. These and many
more issues should be avoided if hedging is above 20% of reserves.
That doesn't leave much to buy does it? Can you see the massive
mismanagement. Shareholders sue the hell out of the officers and
directors, personally.
Merrill Lynch has raised price estimates for most nonferrous
metals for the rest of 1999 and 2000, due to accelerating Asian
growth and continued strength in the U.S. Nickel prices should
average $3.24 per pound, up 35% from their previous estimate of
$2.40. It estimates prices in 2000 at $3.50 a pound. copper in
2000 at 85 cents and zinc at 57 cents.
Our latest information is that Cambior will produce 630,000 ounces
of gold this year at $215.00 an ounce, and 700,000 ounces in each
of the next three years at $200 an ounce. As of June 30th they had
hedged 1.3 million ounces at an average of $350 an ounce. On
September 30th they reported having sold forward 2.67 million
ounces at an average price of $318 an ounce and had also sold call
options for 1.9 million ounces at an average price of $315 an
ounce. Of those call options, 921,000 were at $287 an ounce,
maturing before the end of 1999. 299,000 ounces at $323 in 2000;
382,000 at $352 in 2001, and 303,000 ounces at $348 in 2002. They
now are naked on calls for 1 1/2 years production and are already
out of the money, $30.00 an option. They were assisted in
accomplishing this feat by bullion banks who provided them with a
$250 million, 5-year, revolving credit facility. Again, the action
to be taken is for shareholders to sue the officers and board of
directors. The company should also sue the bullion bankers who
knew these changes were coming. These lenders and writers of
derivatives had a fiduciary responsibility to Cambior to inform
them of the impending change of direction regarding gold by
European Central Banks. Gold will rise higher and Cambior and all
those other highly leveraged gold producers will go into
bankruptcy. This is part of the worldwide systemic problem facing
world financial markets - as gold goes higher the rush to flatten
positions will become manic. This, as you can see, is only the
beginning of the gold run. It has a long way to go even after the
shorts cover.
South Africa is launching a millennium version of the world's best
selling gold bullion coin. The 22-carat Krugerrand 2000 gold coin
in the classic 1 ounce, half ounce, one quarter and one tenth
ounce. Demand for the newly-minted coins is expected to exceed 4
million ounces in 1999.
The party is over. The European central banks declaration that
there will be limited gold sales and no leasing for five years
signals recognization that the world financial system is bankrupt.
You readers may find this observation harsh, but after 40 years in
the financial trenches we know when the tide is turning. The
bankers know the jig is up. You can only paper over implosion for
so long. EU bankers have brought gold back into the financial
system as a gold-reserve system. The ECB, Sweden, the BofE and
Swiss national banks, all included, hold 12,574 tons of gold,
making them collectively the world's largest single holder of
gold. Abandoned, is the position, that gold is barbaric or an
absurd anachronism, which earns no income. These negotiations have
been going on for at least 6 months. No one was listening when in
May Alan Greenspan told Congress, "We should hold our gold." Debt
borne paper currency by its very nature is fiat, but gold is
always accepted. The return to gold is a return to institutional
sanity.
Speculative shorts, derivative freaks and those enmeshed in the
gold, yen and Swiss franc carry-trade are taking massive losses.
The sure bet is over. A witness to the deluge is 30 year U.S.
Treasury yields that have hit 6.35%. A good part of all those
borrowed funds went into the long-bond and those bonds must be
sold to raise cash to liquidate carry positions. As long as the
yield continues to rise you'll know there are still speculators
out there covering their shorts. We suspect the Fed has bought
billions of dollars worth of Treasury paper to keep the yields
from going into the stratosphere. That is monetization and it's
very inflationary. Some important events that are about to follow
are national bankruptcies. Ecuador is the first and over 100 will
follow. Inflation and default the worst of all worlds' accompanied
by a flight to quality, which is gold.
It has come to our attention that Glamis Gold (GLG.TSE) has hedged
36% of 2000 production at $275, of which 63,000 ounces at $288 are
forwards and 19,000 are spot deferrable call options. For 2001,
24% of projected production is hedged with call options at $295 an
ounce. For the balance of 1999, about 55% of production is hedged
with 16,400 ounces of forwards at $288 and 20,500 calls on 20,500
ounces at $301. Here is another producer that has themselves in
deep water. We'd invest in some other gold mining company.
Eldorado Gold Corp. (ELD:TSE & USE). We cannot get excited about
ELD's Kisladag property in western Turkey. The area is in the
midst of what could easily soon become a battle zone. We'd think
otherwise if Russia wasn't having its current conflict in
neighboring Islamic nations. We think that part of the world could
lead to a third world war. Irrespective the company made 4 cents a
share earnings on record gold production of 98,553 ounces at a
cash cost of $190 an ounce. The problem is ELD now has 510,000
ounces of gold hedged, representing 100% of production for the
next three years at an average price of $297 an ounce. Hedging is
10,000 ounces a month at $310 and 200,000 ounce spot deferred at
$260-$270. Fundamentally this is a good company whose earnings
potential for the next three years is poor. What was management
thinking about, gambling in the derivative market? We would not
buy this stock at this time.
The new Venezuelan mining law is in effect. It stipulates that all
mining development must proceed with the consent of the holder of
a "registered concession." Parties that only hold mining contracts
must convert the property to be mined to a registered concession
before continuing mining work. They have 90 days from
approximately Oct. 7th to complete the process. Crystallex,
through one of its subsidiaries, is the registered holder of the
Las Christinas concession. Place Dome, on the other hand, has a
contract relationship with CVG to develop Las Christinas and
according to the new law PDG has 90 days to go to KRY, as
registered holder of the land, to seek KRY's consent to register
PDG as holder of the concession. PDG cannot continue development
without consent of the registered holder. If this view is correct
then PDG will have to inform its shareholders and the public
explaining its new found position. The bottom line is everything
flows from title. If our assumptions are correct, and because we
are not Venezuelan attorneys, we have to consider our assumptions
guesses, then KRY has a tiger by the tail.
Robert Chapman
19 October 1999
Published and Edited by: Bob Chapman
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