Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: tyc:> who wrote (2798)	5/17/2002 9:45:38 AM
From: nickel61	Read Replies (1) \| Respond to of 3558

Let's take them one at a time... "Did you read (probably not) that Barrick makes more money if interest rates go up." Well yes I did, why is that? Well according to the financial statements it is because they are using their future estimates or the amount of interest they will earn on the sale proceeds to be added to the amount they got for the borrowed gold sale. This contango is the premium they are referring to. So quite naturally they are getting more compounded interest the longer they project the contract will run before they deliver the gold and close it. If it is five years they are projecting the spread between the cost of borrowing the gold (the lease rates at 1% or 2%) and the returns they will expect to get on the proceeds invested in bonds at say 6% or 7%. The longer out before they close the contract by delivering the gold and repaying the loan of gold from the bullion bank the more compounding they recognize on the proceeds of the sale of the borrowed gold at spot. Are we together so far? Example: Barrick sold 1,000,000 ounces of gold at $290/ounce in 1999. The proceeds $290 X 1,000,000 = $290,000,000 are invested in bonds yeilding 6% for five years. The cost of borrowing the gold is the lease rate (1%) and the actual proceeds net from the sale of the borrowed gold into the spot market in 1999. So this cost moves with the length of the contract before it is closed by the delivery of the gold. The future proceeds also moves depending on how long the contract stays open, i.e. do they roll it forward or are they forced to deliver into it. So by 2004 the premium sale price they would be expecting to recieve is $290,000,000 times the compounded effect of investing the proceeds for five years at 6% interest. or $388,085,417.50 minus the compounded cost of the leases which is the charge (lease rate) plus the opportunity cost of replacing the gold five years in the future. They borrowed the gold remember from a central bank vault and now have to replace it with production from their mines that could otherwise be sold into the spot market. So lets say gold stays constant in price at $290 then add five years of lease rates (1%)/year and your cost would be 1,051,010 ounces of gold to be delivered to the bullion bank /central bank. So the Premium is the difference between the two. $388 million total proceeds (the origional spot sale plus five years or investment returns) minus the current spot cost of 1,051,010 ounces or gold at $290/ounce that is $305 million at $310/ounce gold that is $326 million and at $350 gold that is $368 million. The spread narrows rather significantly in a rising gold price enviroment. In this example the spread disappears at $370 gold. In other words the total "premium would have been offset by a rise in the gold price on the gold to be used to deliver into the contract. I think we all will be able to agree with this so far. Do you follow? Tyke?

To: tyc:> who wrote (2798)	5/17/2002 11:02:29 AM
From: nickel61	Read Replies (1) \| Respond to of 3558

I am not asking Reg Howe.... I am asking YOU !! Can't you remember what he said ! Hahah ! Try thinking for yourself. Well I am answering. Whenever you would like to pursue it and like you cautioned me: "You are making yourself a laughing stock." Don't be afraid to expose your level of understanding.