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

To: Activatecard who wrote (2486)	5/3/2002 9:31:53 AM
From: nickel61	Respond to of 3558

Good question...

To: Activatecard who wrote (2486)	5/3/2002 9:58:51 AM
From: Enigma	Read Replies (2) \| Respond to of 3558

Steve - item 3 why do you not want to have to have to understand? Are the financial statements prepared according to GAAP or are they not?

To: Activatecard who wrote (2486)	5/3/2002 12:00:33 PM
From: russet	Read Replies (3) \| Respond to of 3558

Just who is buying ABX's gold at $75.00 over spot. Nobody,... the counterparty was the bullion bank that lent Barrick the gold in the first place, and Barrick will return that gold to them in the future. ABX sold the gold in the past and took the proceeds and invested in bonds. The $75 is the interest from the bonds minus the lease rate to borrow the gold. By doing this they lock in a price for gold they will produce in future years. For instance, they may have sold the gold 2 years ago at $300 and invested the proceeds in a bond that matures in 5 years giving 6% interest. The gold was leased for 5 years at 1% interest. They match the bond to production 5 years later, locking in a price of $375 per oz for their gold production in 5 years. They are guaranteeing that they will get at least $375 per oz for that gold. The above is the critical point in realizing that the majority of Barricks hedging is very different from what most people think, and what most antagonists try to present. It involves little use of options unless they write call options, or use them to protect against harmful moves in currencies. If the price of gold increases above $375, Barrick must write down the value of the hedge on their balance sheets by the difference and book it as a loss as they did this quarter, but this still equates to selling the gold for $375 in five years even though they borrowed and sold it some years back for much less. Barrick is not leveraged by doing this because they have the reserves in the ground, it is like a covered short. Any hit it takes on their income statement by doing this does not affect their cashflow. It is analogous to what all the unhedged companies have had to do to their balance sheets and income statements when they originally valued their reserves at $400 gold and the price slid to $300. They had to take a $100 per oz loss on paper for each oz they held in reserves, and some reserves were lost because they became uneconomic at $300 so they must be written off too. If you don't understand the above (and most don't) it will be difficult to continue the discussion. Some of your questions don't really apply to this kind of hedging. Keep in mind, the main reason Barrick is hedging, is too lock in a higher price for the gold they sell in the future, than is possible in the present. If the gold price swings up, they still get the locked in price for their gold, and can deliver the gold into the hedge when the loan of gold expires, or can roll over the hedge at current interest rates and make more interest income. Several weeks ago, I linked to a post on the POG over 100 years. It was evident from that post that the POG is generally stable for long periods of time, or declining in price. Every now and then, it spikes up over a short time interval (normally a year or less), but then usually recedes for a longer period of time. It is this historical behaviour of gold that Barrick seeks to take advantage of by hedging small amounts of future production every month. In a year when gold spikes up, similarly hedged producers will take a "paper" hit because they must write off the value of the hedges to reflect the current gold price. When gold starts to droop again, they can write up the value of the hedges and increase the net income to reflect the increasing value of the hedge. This adjustment has no effect on operating cashflows. Anglogold, Anglo American, Newmont, PDG, and other major producers all carry similar hedges on their books. All are writing down the value of their hedges presently and adjusting their hedge book to take better advantage of the rising POG. Operating cashflows are not being changed from their expected budgeted amounts on their hedged production. The unhedged annual production will be fully exposed to the POG. If you back off Barricks hedgebook writedown, you will see net profits are the same or better than last year. They will pay less taxes because of the writedown, but still get the benefit of any increase in the POG for oz sold at spot. Barrick is not troubled in any way by the "paper" writedown. It does not affect their debt ratings, lease agreements, relationships with suppliers or lenders or analysts, ability to continue with mine developments or the expected profitability from any mining operation or exploration. The increase in POG is making them more aggressive in exploring for precious metals, and is increasing the value of their reserves and if maintained will increase their revenues and profitability. These concerns over the hedge book of Barrick, are a red herring.