My post using trees was more to outline the mechanism of forward selling. Not intending to go into problems that could affect delivery which all companies face to generate income, hedged or unhedged.
Perhaps the simplest way to think about Barrick's gold leasing contracts is to look at a typical years production of 6 million gold oz. 1.5 to 2 million gold (depends on the year) is sold short in previous years and 6 million oz gold is coming long from production in that year. The 1.5 to 2 million sold short oz, are equally cancelled out by an equal amount of long production no matter which direction the price goes (they effectively locked in a price for a portion of the production,... its like having 1000 shares of some stock short and long at the same time),...and the 4.5 to 4 million production left is free to get the spot. Additionally the 1.5 - 2 million short and long were opened at an average of $360 for 2002, and for the next 14 years at $340. The short contracts are uncallable and will go to term.
I believe the problem most people have, is the simplicity of the contracts. No one believes they are so simple. Barrick gets simple contracts without encumberments for up to 15 year leases with low gold lease rates for several reasons,... no net debt, an AA rated balance sheet, high annual production, and big reserve and resource base, an incredible record of operations, and they own a Bullion Bank!!! The actual details of the contracts are proprietary and likely subject to muzzel agreements on both sides,...the bank would not want its competitors to know the terms they gave Barrick, and Barrick would not want its competitors to know what they got from the banks. But the basics are there,...term, uncallability, etc.
Some of the posts I made to Nickel were stupid,...he dragged me down to his level and I acted as stupid as he did in a few. I agree with you that ideas and conversation are the value here, and when the insults start it is time to go to somewhere else.
Seems like Barrick made Sprott see the error of his ways (ggggggggg),...
Sprott retracts comments about Barrick
Hedging program
Paul Haavardsrud
National Post
Saturday, June 22, 2002
National Post
Randall Oliphant, president and CEO of Barrick, has long defended the gold producer's hedge book.
ADVERTISEMENT
CALGARY - High-profile fund manager Eric Sprott backtracked yesterday on allegations Barrick Gold Corp.'s hedging program would leave the company vulnerable to massive losses if the price of gold moved dramatically higher.
The founder of Sprott Securities issued a formal written retraction of an earlier research comment that had highlighted his concerns over the risk of gold hedges in a rising market for gold prices.
After consulting with Barrick and further analysis of the firm's public filings, Mr. Sprott retracted his warning to clients that Barrick could be subject to potentially ruinous margin calls if gold continues to rise sharply.
"When a series of misleading and utterly irresponsible statements are made they need to be corrected for the proper functioning of the capital markets," said Barrick spokesman Vince Borg. "They have done that and we accept that."
Mr. Sprott issued the retraction, saying he recognized his primary assumption about Barrick's gold hedging program was incorrect.
Earlier, his call had assumed the liability for the hedging program rested with Barrick, when in fact the primary hedging transaction is done, not by Barrick, but at a bullion bank.
"Is Barrick Gold Corp. subject to margin calls in a rising gold market?" Mr. Sprott asked rhetorically in a note disseminated yesterday. "As the company asserts in various filings, the answer to that question is simply no."
Mr. Sprott, who recently told the Financial Post his concerns were strong enough to convince him to sell Barrick shares short in his hedge fund, could not be reached yesterday for further comment.
Mr. Sprott also said the suggestion Barrick had already been subjected to a margin call by its counterparty lenders was incorrect. An earlier investment decision made by Barrick had been misunderstood by Mr. Sprott and other market watchers, he noted.
While investors would benefit if Barrick consolidated the disclosure of its hedge book into a single document, on the whole the firm's disclosure, which he had been critical of in the original note on March 31, is also commendable, he wrote. "I'm pleased that [Sprott Securities] has come out and done this, because it sets the record straight, corrects the misstatements that were made and addresses the primary issues of false information that they had previously put out," said Jamie Sokalsky, chief financial officer at Barrick.
As the largest hedged gold producer in the world, Barrick, the world's second-largest gold producer, has been a lightening rod for criticism from those who believe producer hedging programs have kept the price of gold artificially low.
Despite numerous explanations over the years from chief executive Randall Oliphant, and other members of Barrick's management team, about how the firm still reaps tremendous benefits from rising prices, goldbugs have remained adamant Barrick's hedge book will one day bring about its demise.
Although Mr. Sprott still fundamentally disagrees with producer hedging, he said it was unfair to single out Barrick in his earlier note.
"Furthermore, it was also unfair to imply that it is Barrick that is at risk in a rising gold price/lease rate environment," he wrote. "In fact, of all gold hedgers, Barrick would appear to be one of the gold companies that is least at risk." |
