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Gold/Mining/Energy : Gold and Silver Mining Stocks -- Ignore unavailable to you. Want to Upgrade?

To: Enigma who wrote (320)	6/7/2000 10:41:00 PM
From: russwinter	Respond to of 4051

No crusade, this will be about it. I believe I understand the basics completely. I'll just summarize it : Hedging in the form of spot deferred contracts, call writing, futures sells, or various derivatives is poor business practice (especially in the extreme manner of the companies mentioned) for the following reasons: 1. There is production (political, financial, act of God, bad luck, inept management) risk. If you can't deliver you are short the very commodity you are in business to produce. 2. If POG moves significantly higher you are left at the gate. Obviously the market has already rerated hedgers lower. It's no accident that the XAU is at 58 tonight. Most investors are in gold stocks to participate in the open ended call potential of gold, not to participate in a spread business. If I wanted that I'd buy a bond. Hedgers will disappoint (as they have already) in any significant gold rally. 3. There is counterparty risk and I think a lot. Remember portfolio insurance (1987), or Long Term Capital Management, (1998)? How about Japan's TOCOM? Have the hedgers undressed their counterparties. I doubt it very much. Probably just relying on credit agency ratings. 4. There is black box risk, especially if we get illiquid, out of balance, bullish (for gold, not hedgers) market conditions. 5. Selling forward at todays's prices or failing to cover old sales at today's prices is in essence a liquidation of capital. The true COMPLETE COST of production: cash, development, exploration (including losers), corporate overhead, finance costs is rarely below today's price, especially if you actually expect a return. Solutions: 1. Monetize the hedges by aggressive buying (not just delivering production)in the open market. If it's a spot deferred, substitute a matched long future. and/or 2. Increase production quickly, buy out juniors, get projects going now because there is a couple year lead time. 3. Recapitalize the industry with mergers of real companies, shut down stale, expensive production (and companies)that depend on hedges to function. It may be necessary to find other resource companies in other fields to reinject capital to clean up the mess. I really don't see any of this happening with the present crop of majors. I don't expect many (or their managements)to be around in their present form much longer if things don't change.