Board-Ansicht
Mix-Ansicht- Lieber pleite gehen als den Goldshort bedienen? - R.Deutsch, 26.02.2003, 21:59
- Re: Lieber pleite gehen als den Goldshort bedienen? - Sehr lesenswert, danke! (owT) - Popeye, 27.02.2003, 07:23
Lieber pleite gehen als den Goldshort bedienen?
-->By: Tim Wood
Posted: 2003/02/25 Tue 21:00 EST | © Mineweb 1997-2003
NEW YORK -- Newmont [NEM] has provided unusually fulsome disclosure - as far as gold producers go - on a troublesome portion of its hedge book. The revelations are important because they potentially recast the definition of hedging margin calls, as well as provide an unusual view of hedging counter party risk management.
Newmont revealed that its hedge counter parties for the Yandal operations - understood from Australian sources to originally be JP Morgan Chase and Credit Suisse First Boston - have exercised “right-to-break” clauses prior to the scheduled maturities of Yandal’s forward sale contracts. This means that the counterparties can demand cash settlement rather than wait to take delivery of promised ounces of gold.(See table at end of story) Both JPM and CSFB have wound down their gold operations substantially, and the current Yandal counterparties are likely other banks.
The counterparties demanded early cash settlement in December and January, with the right to do so again in June 2004.
The right-to-break amounts to a type of margin call since it creates a distinct liability that is solely determined by the counterparty and is vastly different in character and impact from hypothetical mark-to-market losses conventionally reported. If anything, it looks like a clawback.
Yandal is the festering sore on Newmont’s overall hedge book, comprising two thirds of its unrealised negative value of $433 million. Alarmingly for American investors, but commonplace for their Australian counterparts, is Yandal’s paucity of reserves relative to its hedged commitment - 2.1 million ounces and 3.4 million ounces respectively. The 1.3 million ounce deficit is equivalent to nearly two years of production and can only be offset by a large exploration discovery or by buying metal in the market.
Brinkmanship
Newmont is the first company to detail hedging right-to-breaks, but the move could compel other companies to provide similar disclosure where they are similarly affected; at least investors should demand it.
The number one gold producer can afford the broader disclosure because it holds an ace up its sleeve - Yandal is ringfenced from Newmont, just as the operations were when engineered into Great Central Mines and then Normandy. Newmont reinforced the arms length relationship in its 2002 second quarter report to the SEC wherein it clarified its repurchase of Yandal’s outstanding senior notes worth $300 million: “Newmont’s offer, however, should not be construed as a commitment by Newmont to provide ongoing financial or credit support to Normandy Yandal.”
Consequently, sources say Newmont is prepared to try brinkmanship with the Yandal counterparties. The right-to-break options bunch up in 2005 and, assuming gold prices at least stay in the $350 per ounce range, would bankrupt Yandal. Newmont is apparently prepared to let that happen rather than defend Yandal with what could be a year’s worth of group profits, especially if gold prices rise as many expect and clobber the hedge book even more.
If the counterparties go ahead and call for accelerated cash settlement then they’ll simply be joining a line of creditors, along with Newmont. In one respect it would help Newmont by vapourising 3 million ounces of unwanted hedge commitments. On the other hand, it would cost 2 million ounces of reserves at a time when the market is desperate for them as well as roil the bullion banking business that is already a victim of declining liquidity.
The bullion banks are clearly trapped. If they do not offer Newmont some assurance that they will hold off from cashing in, then the producer has no incentive to invest in exploration; indeed to do anything other than high grade the operations into premature closure. That would leave the bullion banks will a fraction of what they are after. Alternatively, if they back off the cash calls, then they could at least get the ounces back, but have to face down the increasing risk implicit in a rising gold price.
Risk
The problem is all risk - what else could have triggered the cash calls. Yandal’s impecunious balance sheet and the sharply higher gold price has clearly caused turbulence in the counterparties’ own offsetting contracts.
So Bullion banks' willingness to stay their cash calls may be a function only of their leverage over players further along the chain. In the case of the Australian banks it seems, from anecdotal evidence, that they are under some pressure to deliver on their portion of producer hedge agreements, while the country’s Central Bank is no source of help given its gold reserve sales and past heavy lending.
That has some experts convinced Newmont’s brinkmanship could have ramifications for bullion banking across the globe.
It is another timely reminder of how bullion banks held the upper hand when providing financing for new projects through gold forward sales, protecting themselves in several ways whilst leaving shareholders vulnerable. More so for companies with feeble balance sheets to begin with - companies investors should not have been encouraging to bring marginal deposits to account anyway.
Yandal
Yandal was bathed in controversy after being used as the vehicle by which Normandy’s Robert Champion de Crespigny and fellow Aussie magnate, Joseph Gutnick, gained control of Adelaide based Great Central Mines at a great price. Normandy and Gutnick’s family business were subsequently charged with acting illegally in the takeover, but the matter was overturned on appeal. Great Central subsequently came to be wholly owned by Normandy.
Yandal consists of the Bronzewing, Jundee and Wiluna mines which produced a combined 177,000 ounces of gold in the fourth quarter.
Comment on this story >
Gold hedging brinkmanship is here (Tim Wood)
.. Where'Ya Gonna Go When The GOLD Derivatives VOLCANO BLOW!!! (The L1 Ranger!)
.... To a place where poets like you don't exist. ()
.. Math (Red Baron)
.... Excuse my ignorance (Jack Fortin)
...... some questions for Tim (Heidi)
........ Very insightful questions (Tim Wood)
.... All US dollar figures. (Tim Wood)
.. Wow! Good thing ABX doesn't have any right to call clauses in their hedge book. (Curious)
.. Bullion Banks Have a Problem - Pierre and Seymour Will Win - Bullion Dealers Squeezed (John H. Mesrobian Esq.)
.... Newmont will win (Adrian Day)
...... However... (Grin Sweeper)
.. BEST ARTICLE EVER ON MINEWEB, THANK YOU. (NI)
.... Newmont (Steven Kowalski)
.. Is Right to Break a purely Australian thing? (E Mahoney)
.. A fascinating article -- well done! ()
.... Now you're smoking, Tim! (bob wansbrough)
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