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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (33826)	11/23/2003 4:06:01 PM
From: mishedlo	Read Replies (2) \| Respond to of 36161

Tippet Barrick sold forward over 1 years if not more of their production if I am not mistaken. They got a slightly higher price but now they are getting screwed and decided to stop. Selling what is coming out of the ground now or next month is not hedging (to me anyway). Beyond a couple months it sure is IMO. Better yet is if they hold back like GG. M

To: yard_man who wrote (33826)	11/23/2003 4:32:25 PM
From: Joan Osland Graffius	Read Replies (1) \| Respond to of 36161

tippet, I have no idea what is going on in the gold markets. This is how I think of commodity producers. If I am a farmer and have completed my harvest. The harvest is stored and the farmer has bills to pay for the harvest. Assume this farmer is free of debt and will not borrow to pay for current costs. Also assume the product can be stored for a very long time. The farmer has two choices to sell. They can sell at current prices or if a future contract has a higher price and is within the obligation to pay the bills they will choose to sell a future contract not the current contract. There is some risk in this future contract as there may not be railroad cars available when your sale gets executed so you need sufficient capital available to buy the product from someone else where cars are available to deliver. The farmer has no reason to sell more of the harvest than what is required to pay for current costs. The farmers currency is the product not a fiat currency. When land prices are depressed the farmer will in general elect to sell stored production and buy more land (reserves). The metals producer will accumulate cash to replace reserves. I know some will borrow capital or float shares and dilute stockholders equity to expand which has a cost associated with future production. The metals business is a little different than the farming business as they will continue production and sell into the markets as long as it is profitable. If business is not profitable these folks will shut down production of reserves that are not profitable. We did see some metal producers selling forward production during the bear market, but as you notice they get in trouble playing this game. The farmer in general will not shut down production when profits are a problem as the farmer only needs to sell the production required to pay current costs and can store production that is not required for meeting these costs. What I am trying to say is commodity producers are very different from General Electric, P%G, etc. when it comes to currencies. Their currency is the commodity not a fiat currency. I am thinking of commodities that have a long shelf life. <g>