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--- Begin Message ----Caveat Lector- Newmont's hedge book bites back; Yandal worth more dead than aliveBy Steve Maich Financial Post (National Post), Canada [EMAIL PROTECTED] March 4, 2003 http://www.nationalpost.com/search/site/story.asp?id=2E027DDE-4401- 49AF-85ED-980113D219CF After months of wondering what nasty surprises might be lurking in the hedge books of the world's major gold miners, the market is now getting a look at the industry's first bonafide hedging disaster. The situation now unfolding at Newmont Mining Corp.'s Yandal project in Australia is enough to send a chill through any investor who's ever wondered what might happen if a heavily hedged producer lost control of its derivatives exposure. In the case of Yandal, Newmont might be forced to walk away from an otherwise profitable mine that produces about 650,000 ounces of gold each year. Standard & Poor's cut its credit rating on Newmont's Yandal operations by three notches to junk status yesterday, after reviewing the project's hedging exposure, released by Newmont last week. The project's credit rating now sits three levels below investment grade, and its outlook has been lowered to "negative" from "stable." "Without support from Newmont or a material change in current conditions, it is unlikely that Newmont Yandal will be able to pay its 2005 settlement exposures," S&P analyst Thomas Watters said. "With this additional information, it increases the uncertainty surrounding parental support [from Newmont]." Even by the gold industry's relatively aggressive standards, Yandal's derivatives exposure is stunning. The unit has 3.4 million ounces of gold committed through hedging contracts that had a market value of negative US$288 million at the end of 2002. That would be a problem for any major producer, but the situation is particularly dire for Yandal because the development's total proven and provable gold reserves are just 2.1 million ounces. In other words, the project has, through its hedging contracts, committed to sell 60% more gold than it actually has in the ground. Making matters worse, the mine's counterparties can require Yandal to settle the contracts in cash, before they come due. In all, about 2.8 million ounces are subject to these cash termination agreements by 2005, which could cost the company US$223.7 million at current market prices. With insufficient gold to meet its obligations, and just US$58-million in cash to make up the difference, bankruptcy may be the only option available to Yandal, analysts said. Comparing Yandal's reserves to its hedging liabilities "suggests that the Yandal assets may be worth more dead than alive," CIBC World Markets analyst Barry Cooper said in a report to clients. All this is raising even bigger questions about the impact that the Yandal situation might have on the industry's other major hedgers. Companies such as Canada's Barrick Gold Corp. and Placer Dome Ltd. have lagged the sector's strong rally of the past year, largely because many investors and analysts distrust the companies' derivative portfolios. A high profile blow-up for Newmont, the world's biggest producer, could "send bigger shock waves" into other hedged companies, as investors try to avoid the uncertainty surrounding derivatives, CIBC's Mr. Cooper said. For investors such as Eric Sprott, head of Sprott Asset Management, the situation at Yandal underscores the threat that hedging poses to many of the largest players in the industry. Mr. Sprott, a big fan of gold stocks in general, has been an outspoken critic of the extensive hedging programs employed by the likes of Barrick and Placer Dome. Most such hedging programs are closely guarded secrets within each company, meaning investors often can't gauge the risk of holding the stock until it's too late, he cautions. "This isn't good because it suggests that producers have been taking on risks that they shouldn't have," Mr. Sprott said. "I know all the producers will say their hedge book is different, but as investors we never really know what's in the hedge book." The good news for Newmont shareholders is that the hedging contracts are not the responsibility of the parent company. Newmont can choose to walk away from Yandal rather than cover the losses and appears increasingly likely to do just that, analysts said. Newmont was never a heavy gold hedger, but it inherited large derivatives exposure through its acquisition of Normandy Mining Ltd. last year. Newmont has said it plans to slash its hedge book, and cutting Yandal loose may be just the way to do it. Abandoning the three Australian mines that make up Yandal would cut the size of Newmont's hedge book by more than half, Mr. Cooper said. For now, the management at Yandal can only hope the price of gold crashes, or the Australian dollar surges against the U.S. greenback. Failing that, they can hope that their counterparties agree to restructure their hedging contracts rather than force the company into bankruptcy. But at the moment, none of that seems particularly likely. ---------------------------------------------------- To subscribe to GATA's dispatches, send an e-mail to: [EMAIL PROTECTED] To unsubscribe, send an e-mail to: [EMAIL PROTECTED] ---------------------------------------------------- RECOMMENDED INTERNET SITES FOR DAILY MONITORING OF GOLD AND PRECIOUS METALS NEWS AND ANALYSIS Free sites: http://www.jsmineset.com http://www.theminingweb.com/ http://www.gold-eagle.com/ http://www.kitco.com/ http://www.usagold.com/ http://www.GoldSeek.com/ http://www.goldenbar.com/ http://www.silver-investor.com http://www.thebulliondesk.com/ http://www.sharelynx.net http://www.mininglife.com/ http://www.financialsense.com http://www.goldensextant.com http://www.goldismoney.info/index.html http://www.depression2.tv www.minersmanual.com/minernews.html Subscription site: http://www.lemetropolecafe.com/ Eagle Ranch discussion site: http://os2eagle.net/checksum.htm ---------------------------------------------------- COIN AND PRECIOUS METALS DEALERS WHO HAVE SUPPORTED GATA AND BEEN RECOMMENDED BY OUR MEMBERS Centennial Precious Metals 3033 East 1st Ave. Suite 403 Denver, Colorado 80206 www.USAGold.com Michael Kosares, Proprietor US (800) 869-5115 Canada 1-800-294-9462 European Union 00-800-2760-2760 Australia 0011-800-2760-2760 [EMAIL PROTECTED] Colorado Gold 222 South 5th St. Montrose, Colorado 81401 www.ColoradoGold.com Don Stott, Proprietor 1-888-786-8822 [EMAIL PROTECTED] Investment Rarities Inc. 7850 Metro Parkwa Minneapolis, Minnesota 55425 http://www.gloomdoom.com Greg Westgaard, Sales Manager 1-800-328-1860, Ext. 8889 [EMAIL PROTECTED] Lee Certified Coins P.O. 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CTRL gives no credence to Holocaust denial and nazi's need not apply. Let us please be civil and as always, Caveat Lector. ======================================================================== Archives Available at: http://peach.ease.lsoft.com/archives/ctrl.html <A HREF="http://peach.ease.lsoft.com/archives/ctrl.html";>Archives of [EMAIL PROTECTED]</A> http://archive.jab.org/[EMAIL PROTECTED]/ <A HREF="http://archive.jab.org/[EMAIL PROTECTED]/">ctrl</A> ======================================================================== To subscribe to Conspiracy Theory Research List[CTRL] send email: SUBSCRIBE CTRL [to:] [EMAIL PROTECTED] To UNsubscribe to Conspiracy Theory Research List[CTRL] send email: SIGNOFF CTRL [to:] [EMAIL PROTECTED] Om
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