Barrick's gold derivative bomb is priced at MINUS $500M
that figure is marked to a market price of 310, I believe
their exposure at gold=350 is MINUS $1B
Barrick is now attempting to reverse its massive hedges
but they cannot afford to let the world market know
since as a gold analyst in Toronto put it,
"any whiff that Barrick had stepped into the ring looking
for 23 million ounces would set the market ablaze."
here is an excerpt from GATA Yahoo Message Board
/ jim
---------------
John C. Doody, editor of the numbers-crunching Gold Stock
Analyst newsletter, figures Barrick Gold in its latest reported
quarter saw the mark-to-market value of its so-called hedge
book drop to a negative $121 million as of March 31 from a
positive $380 million on June 30, 2001.
Barrick, one of the world's largest bullion miners, uses
written "call" option contracts and other derivative devices
and gold lending practices to enhance the price it gets for
its ounces of gold. The so-called hedging in the
"spot-deferred market" works well when gold is flat or down
in price, not so well when gold prices are rising, as they are
now.
Doody at Gold Stock Analyst puts the negative swing of the
company's hedge book at $507 million. "This swing far
offsets the net profits earned of $46 mil in the first quarter of
2002 plus the $66 million in the third quarter of 2001 plus the
$82 million in the fourth quarter of 2001. The net is a loss of
$313 million."
In a conference call last week, Barrick's executives assured
questioning Wall Street analysts, who asked numerous
questions about the company's gold-hedging, they were
monitoring the situation. Yet some observers are not
convinced.
"The sensitivity of the derivative portfolio now stands at
about $21 an ounce," says Douglas Pollitt at Pollitt & Co.
in Toronto. "Each $1 an ounce upward move in the gold
price sees the mark-to-market (of Barrick's derivative
contracts) drop by about $21 million. At $350 an ounce,
the mark-to-market would be over $1 billion in the red."
Gold prices this year have risen to $312 an ounce from
$270 at the start of January.
Pollitt calculates the notional value of Barrick's
spot-deferred contracts at 18 million ounces. "Add to this
another 5 million in written call options, (which the company
now calls 'variable priced sales contracts'), and, one way
or another, the company is short about 23 million ounces
of gold. This is a fantastic number and begs the question:
Could Barrick cover even if they wanted to?"
CBS MarketWatch placed a call to Barrick's Toronto
headquarters on Monday regarding the company's
exposure to the hedged market and was awaiting a
response.
The writer of a call option is giving the purchaser of that
contract the right to buy something, in this case gold, at
a strike price written in the contract. In exchange, the writer
of the option receives a little money, a premium. The
strategy for selling a call option is usually to enhance the
value of a security or a commodity when the investment is
declining in price, something that had been happening to
gold for years, until January.
Barrick, to its credit, said in its report to investors that
it will reduce exposure to hedging this year. The Toronto
company, world's second largest gold producer after
Newmont Mining, says it earned $46 million for the March
quarter, down from $87 million in the year-ago three-month
period.
Barrick, according to its quarterly report, sold half its gold
in the spot-deferred market for $365 an ounce. The fact that
it sold the other half in the spot market was a first for the
company. Barrick stated it expects half its gold for the
remainder of the year to be sold in the spot market, where
an ounce of gold is attached to no derivatives and gets
exactly what the spot market is dictating for bullion.
Barrick also estimates that for every $25 increase in the
gold price, the company's annual earnings and cash flow
rise by approximately $70 million. "In total, 22 percent of
reserves, or 18 million ounces, are sold forward using
spot-deferred contracts at an average minimum price of
$344 per ounce, deliverable at the company's option
over the next 15 years," the company stated to investors.
"This position is down from 18.2 million ounces in the last
quarter of 2001 at an average price of $365 an ounce."
Of course, if gold prices were to shoot far higher, in rapid
fashion, Barrick, as a writer of call options, could find itself
required to deliver gold to buyers at prices that are below
the spot price of gold. Other distortions of the gold market
are possible in a gold rally.
Pollitt, the Toronto analyst, says theory and reality are like
night and day. "Converting dollars into gold is quite different
than converting gold into dollars," he said Monday morning.
"When the dreaded yellow metal was in the doldrums and
nobody cared, well, Barrick might have had a way out. But
now? Now you've got good company on the bid, now
you've got all those dollars chasing what little gold is left.
And any whiff that Barrick had stepped into the ring looking
for 23 million ounces would set the market ablaze."
-end- |
