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To: SouthFloridaGuy who wrote (185701)	8/4/2002 2:52:35 PM
From: posthumousone	Respond to of 436258

Even our beloved gold miners are not to be trusted: DRD power hedge to pylon cost pressure By: Pitcher Posted: 2002/07/30 Tue 16:09 ZE2 \| © Miningweb 1997-2002 JOHANNESBURG – Durban Roodepoort Deep's [NASDAQ:DROOY] long-standing association with troublesome derivatives is far from over, notwithstanding claims last week that it had finally buried its hedge book. Chairman and chief executive, Mark Wellesley-Wood, presenting the company's June quarter results, conceded DRD had yet to see out an electricity supply related structure which carries an unrealised loss of about R700 million at the current gold price. The electricity-supply hedge, negotiated with South African utility Eskom at the time of gold's nadir in 2000, sees electricity costs fluctuate in relation to the gold price. Electricity costs are therefore proportionally higher when the gold price increases; the inverse is true when gold falls. There can be no doubt that closing the company's nightmarish gold hedge is great news, ending a string of quarters of staggering opportunity losses, as the gold price marched upward. There was no shortage of facts and figures outlining the benefits of unravelling the hedge book, but details of the power hedge were only revealed in response to an analyst's question. According to DRD financial director Ian Murray, the contract sees DRD deliver gold to Eskom as payment for its electricity consumption. "So it's off the balance sheet," he explains, hence the lack of detail. There will be no chance for the same lack of disclosure next quarter. JP Morgan's Johannesburg-based gold analyst James Wellsted says that while DRD had previously offset the charge against revenue, it would be included as a separate line item in its income statement from September. The hedge that hertz Eskom approached DRD two years ago in a pre-emptive bid to cushion the blow of price pressure on DRD, with a deal which would link a portion of its power bill to the gold price. At the time, bullion was trading at a lowly R55,000/kg, or around $275/oz. Had bullion continued to trend lower, entering into the electricity hedge would certainly have been greeted as a prudent business decision on DRD's part. But unfortunately for the company's management, no sooner was the ink dry on the document than the gold price began an upward run to its peak earlier this year of around $330/oz. Simply put, DRD must now pay the difference between R2,500/oz and the ruling spot on 15,000 ounces of its monthly production for the next three years. Wellsted says that using a spot gold price of R3,100/oz, the company will pay the power utility an extra R600/oz (R3,100/oz less R2,500/oz) on 180,000 oz of its production each year for three years. Murray estimates the mark-to-market close-out cost of the contract to be between R550 million and R700 million, which translates into a monthly cost of roughly R15 million. Shocking. An interesting point to consider is that the electricity position is rand-denominated, which puts it further out of the money with each drop in the value of the South African currency over the duration of the hedge. According to one senior gold analyst, the break-even value of the hedge is around $242/oz, reflecting the drop in the rand since the hedge position was taken out at around $275/oz. The analyst says that with a further fall in the rand likely in future and the outlook for gold positive, DRD should ideally look at buying back the hedge, although he says it is unlikely the group could take the once-off R700 million hit required to exit the position. Murray told Miningweb the company had no plans to buy itself out of the position and would simply wait for the hedge to run its course even if the mark-to-market value of the position volted.