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Strategies & Market Trends : Winter in the Great White North -- Ignore unavailable to you. Want to Upgrade?

To: marcos who wrote (2359)	5/25/2002 11:56:46 PM
From: russet	Read Replies (2) \| Respond to of 8273

The majority of Barrick's hedge book is incredibly simple. So simple it has everyone baffled it seems. Compare it to trees. You have trees, I have trees. We grow trees for income. Let's say we can borrow a tree from a central bank somewhere, and sell it on the spot market of trees for $320. Then we stick the $320 into a bond for 10 years that makes 10%. The central bank charges us 2% to borrow the tree. So we make $320*(10-2%) per year, and the annual interest is placed in additional bonds to compound for the next 10 years. In ten years, that bond will double in value from compounded interest income to $640. If the bonds gives monthly interest, and we invest the interest in more bonds each month, we would make over $700. At the end of 10 years, we give the central bank the tree back by cutting down one of ours, and we cash out the bond for at least $640. The market price for trees goes up and down,...but over 10 years, the average price stays around $320, but we effectively presold our tree when it was small, and had the proceeds collect interest for 10 years, and the net effect at the end of 10 years was we got $640 for it instead of $320. We collect interest on our trees, while they are still growing. This is so simple, only us simpletons, and Barrick (and many other gold producers,...Kinross, Newmont, Placer, Anglo etc., etc.,) can figure it out. Everyone thinks it's much more complicated than this, but it ain't. One other thing,...the bank we borrow the tree from, is the same bank we get the bond from to invest our proceeds. If the bank goes titties up, the tree lease agreement is written such that if they don't give our bond principle and interest back, we don't give them the tree we owe them,...hence no counterparty risk on the principle amount. Of course we spread our risk over all the tree banks,...Royal, Nova Scotia, TD, Commerce, Nesbitt, etc., etc., choosing only the AA rated ones to deal with. The chance of losing our bonds are pretty slim. Another thing is we only do this for a fraction of our total inventories of trees,...say 15% or so, and we only have a similar small fraction of total tree production in any year going to pay back the leased ones,...so the majority of any years production gets the spot price for trees. Barrick says as much in their financial statements, but few have bothered reading them, preferring to let others think for them.