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--- Begin Message ----Caveat Lector- Neither a borrower nor gold lender beBy John Dizard Financial Times Thursday, June 5, 2003 http://news.ft.com/servlet/ContentServer? pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1054416468361 The religious war in the gold market reached a climax this week with the announcement by Newmont Mining that all but one of the gold lenders to its Yandal mines in West Australia had agreed to take 50 cents on the dollar to liquidate their claims. Newmont's buyout offer, which effectively saves the Yandal operation $77 million, is a stunning blow to the gold banking business. For the past two decades, gold mines have been developed using the gold lending market. Roughly speaking, banks borrow gold from central banks and lend it to mining companies. The mining groups sell the gold, use the capital to develop mines, and pay the loans back from their production. Since gold interest rates are far below rates for borrowing in dollars or other main currencies, this has been a cheap way to build capacity. But some gold investors, along with some gold mines, have believed that when mines "hedge" their gold production by borrowing, then selling the gold, they depress the price and cannibalise their ability to profit from future price rises. The "hedgers" believe they are only following prudent practice for commodity producers. This hasn't been a gentlemanly dispute. Newmont, now the biggest gold producer, has become the leader of the anti-hedging group. It acquired Yandal when it bought out Normandy Mining. Yandal, which is comprised of three mines in the Western Australian desert, has repeatedly seen its ore reserve numbers reduced by management, the engineers, and the accountants. According to Newmont, the most recent and relevant numbers showed proven and probable reserves of 2.12 million ounces at the end of last year, against which 3.5 million ounces of gold had been sold in hedge contracts. As a quick pass with a supercomputer will show, 3.5 million is larger than 2.1 million. Therefore the hedge contracts were insupportable. Since the mine's finances are not guaranteed by Newmont, and Newmont doesn't feel like bailing out the banks voluntarily, the banks have no choice but to accept essentially an out-of-court bankruptcy workout. Not so fast, say the gold bankers. Newmont is perhaps not being entirely straightforward in using the "proven and probable" reserve numbers. "The relevant number is the one for the total resources," says a gold lender. In any event, when one of Yandal's gold banks decided last month that it wanted to call in its gold loan, Newmont decided to "play chicken with the banks," in the words of another banker. So far, all but one of Yandal's gold banks have accepted the 50-cents-on-the-dollar deal. The alternative would have been to take their chances in court. On the face of it, they might have done better going that route. Since they should be secured lenders, they should have had a good chance of getting all their money back, admittedly after a lot of lawyer time and, more depressingly, trips to the western Australian desert to visit their new property. However, we may get to see some further twists in the story, since Newmont will not close on the buyout offer if it is not accepted by all the banks, which has to happen by June 21. One holdout means the exchange, and with it a related buy-back of a bond issue, could be junked. In the meantime, the gold lenders to Yandal had to balance their books and offset their newly naked short position by buying up gold over the past few months. That 2.5 million to 3.5 million ounces of gold demand has helped run the price up to its recent peak of around $390. Since the uncollectible loans have been covered, demand and the price have slumped. "[Newmont] turned this into a battle of wills with the bullion banks," says one banker. "They paid over the top for a dry hole and got the money back from the banks." Few doubt that miners will find it far more difficult to borrow gold on the same good terms they had before. Banks will want much tougher documentation. Among other points, they will want to make sure that all gold lenders are treated on the same terms. They will want to make sure reserves numbers are real. They will be reluctant to do project financing, or off-balance-sheet financing, of new mines. That means mines will have to be developed with equity financing or the security of a mining company's entire balance sheet and cash flows. Even the gold bulls think it likely that the gold price could fall back for a while, as gold lenders have probably finished covering their Yandal position. There may have been a 1,000-tonne swing in gold demand over the past year caused by hedge buy-backs. That would explain much of the price rise. Any future price rise will have to come from a revival in real investment demand for gold. The bulls hope that will come from new exchange-traded gold bullion shares. The bears, and the bullion banks, think the gold bugs and Newmont have made a massively wrong call. -END- ------------------------ Yahoo! Groups Sponsor ---------------------~--> <FONT COLOR="#000099">Get A Free Psychic Reading! Your Online Answer To Life's Important Questions. </FONT><A HREF="http://us.click.yahoo.com/Lj3uPC/Me7FAA/ySSFAA/WfTolB/TM";><B>Click Here!</B></A> ---------------------------------------------------------------------~-> Your use of Yahoo! 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