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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Ken Benes who wrote (68307)	4/29/2001 6:37:53 PM
From: Alex	Read Replies (2) \| Respond to of 116762

Barrick – gold pragmatist or villain? By: Tim Wood Posted: 04/29/2001 08:00:00 PM \| © Miningweb 1997-2001 PRINCETON, NJ -- Barrick CEO Randall Oliphant can never be faulted for consistency. Obviously painfully aware of the militancy of some gold investors, he always goes out of his way to stress the success of the company's "premium gold sales programme". Well he might since it has beaten the spot market for 53 consecutive quarters. - That's not good enough in some eyes though. No matter how pragmatic delivering extra value over such a prolonged period is for shareholders, there is a hard core of market players who accuse Barrick of putting itself ahead of the very product it derives its identity and earnings from. It is seen as a spoiler, using hedging in such a selfish way that the market is ruined for everyone else. This is the heart of what is essentially a philosophical debate about creating shareholder wealth in the gold industry. The passive version of the debate, the most popular among gold bugs, suggests that value flows from an unencumbered gold price. Naturally, hedging encumbers gold and therefore blights the entire industry. The active version, favoured by the likes of AngloGold and Barrick, treats wealth creation as the skilful navigation of circumstance and opportunity. Hence hedging is a no-brainer when your core product is losing value all the time. Crossing the line However the hedgers now appear to be falling victim to their own success, which is stoking investor militancy and claims of a grand conspiracy against the yellow metal. There is a palpable sense that investors now view the major hedgers as less opportunistic than grasping, responsible for undermining the entire industry for short-term gain. Of course, it's impossible to draw a precise line indicating where hedging moves from too little, to just right, to too much. In the larger context, there is definitely a point in the last four to seven years when central bank sales and producer forward sales catalysed each other and the resultant chemistry has been fatal for the gold price. As the realization of what gold was up against became apparent, it was inevitable that producers, because they are accountable and accessible to thousands of investors, would bear the brunt of dissatisfaction with gold's performance. Blaming only producers and their bankers ignores the overall chemistry among investors, the gold companies, their sources of finance and global economic cycles. Faced with stiffer competition from other sectors of the economy, without pricing power for their product and no help from high inflation among the OECD countries, gold mines saw investor interest slipping away at every level. As a consequence, financing became more expensive and that made it even harder to achieve the near-term returns offered in technology, media and telecoms. Business as usual was not an option in the gold industry after 1995. Treasury vs geology Inevitably, mine treasury divisions began to play a role equal to or larger than the geologists in determining business strategy. The reality is that hedging was a response to an already declining gold price, not the cause of it. Hedging provided gold companies with the means to outperform the spot market and maintain a project pipeline, which investors insisted on for valuation purposes. However, there is no question that if hedging were stopped today, the price of gold would surge, as it is unshackled from the cumulative effects of years of forward sales. In Barrick's case it has played the hedging game brilliantly. Four and a half years of beating spot is no mean feat and just this quarter it realized $340 an ounce against the market average of $264 per ounce. Operationally it has also outperformed, meeting all the cookie cutter criteria for a good gold mining investment. The problem with such success is that Barrick's profits now look more like a bank's than a gold mine's. Half Barrick's cash flow comes from financial engineering, which is anathema for old school resource investors. Oliphant is perplexed at suggestions that it's not the proper way to do things and argues that the treasury and mining operations are indivisible, all underpinned by gold. He hasn't convinced everyone. Firebrand metals fund manager Bill Belovy, made the point during an analyst conference call last week: "Less than 20 per cent of [Barrick's] net income before tax comes from mining, the rest is essentially banking - will you ever increase your dividend yield to reflect your banking profits?" Average yields for S&P 500 banks are 3 per cent against Barrick's 1.34 per cent. Playing long short One aspect hedging critics consistently overlook in charging short-term greed, is that all the leading hedgers are up to their necks in long-term projects. If AngloGold and Barrick really were malevolent, they would not be risking capital on new projects and expansions if bloodsucking was such a profitable alternative. If there is a conspiracy between the producers and their bankers, then it has to be explained why they're making such a hash of things. Shorting gold is one thing, but why waste all that time, effort and money sinking holes in the ground when shuffling electrons between trading desks supposedly has better returns? The reality is always more mundane. There is no end game in the industry, no final whistle signalling full time. Gold companies are simply behaving in a way they believe creates the most wealth over the longest period. Some choose hedging, some don't. So far, there is insufficient evidence to declare absolutely which version works best because hedging is so intertwined with global economics. The Ashanti and Cambior versions certainly didn't work, but so far those for Barrick and AngloGold have. The only way we'll ever know which model is better, is if the gold price goes to $320 an ounce very quickly and stays there for a long time. Then every hedger will be forced to mark to market in unfavourable conditions and we'll find out just how much of the promised upside exposure is available even as the downside is protected. In the meantime, it's simply about returns and if hedging adds a few per cent then so be it. m1.mny.co.za