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

To: ForYourEyesOnly who wrote (1430)	10/20/1999 12:38:00 AM
From: Investor-ex!	Read Replies (1) \| Respond to of 3558

THC, I haven't seen Barrick's contracts, though I would like to. It's my understanding that a forward sale amounts to one party (Barrick) leasing product from another party (a bullion bank or central bank) and delivering the leased proceeds to a third party for fixed "advance" compensation. I'm not sure how the "spot-deferred" clause affects this basic outline, but I'm guessing the bullion bank or central bank allows a continuation of the original lease agreement up to some maximum extension (15 years) so that Barrick can sell the production slated for return to the bank into the spot market because the spot price received would be more rewarding to Barrick at the time than closing the forward sale. Perhaps you could clarify this. You say "most have provisions that allow for the loans to be called....". What are those provisions? As far as I can tell, the agreements have no such clause as long as the lease payments adhere to the terms of the lease agreement -- most likely this means the lease payments are kept current. Please direct me to a source directly pertinent to Barrick's forwards, outlining the exact circumstances under which the lease contract would no longer be honored and immediate delivery would be required. I don't believe such a source exists, but I'm game. "Total hedge position is about 3 to 4 times annual production. Annual production = 3 to 4 M oz, hedge = 11 to 13 M oz." I think you're assuming that all production is contracted for and delivery must be made over the immediate few years. This is clearly not the case. These forwards are spread out over the next 15 years, or Barrick has an option at their discretion to spread them out over the next 15 years, amounting to a bit more than a million ounces per year. Total hedge = 18 million oz. (14 million oz. in spot-deferred forwards + 4 million oz. in convertible calls). Maximum delivery period is 15 yr. Average 18 million oz. / 15 yr. = 1.2 million oz./yr. Total current production is 3.7 million oz./yr. 1.2 million oz./yr. / 3.7 million oz./yr. = ~32% (the average hedge level over the next 15 years at current production levels). Note that Barrick has ~75% of total reserves unhedged. I believe that if spot gold continues to rise, more of Barrick's "resources" (those areas that are currently uneconomical to mine) may be added to the "reserves" column, futher increasing the percentage of unhedged reserves. A gold mine is a business. Businesses have risks. Businesses require capital for expansion and development. A prudent level of hedging is both cheaper than borrowing and more predictable than the vagaries of the marketplace. I guess hedging is a bit more complicated than most gold investors would like, but I'm personally not inclined to throw the baby out with the bath water when a little reflection would reveal that not all hedge programs are the same and that some hedging is good management. As always, it's a matter of degree -- a question of balance. I think Barrick is a little heavy on the hedge, but within norms. Smart hedging is better than no hedging, but no hedging is better than dumb hedging. I think Barrick is a smart hedger. Others disagree. Good luck in your gold investing. Take care...