-Caveat Lector- FYI
> ------------------------------------------------------------------------ > > Subject: [GATA] Could Barrick cover short position of 23 million ounces even if it >wanted to? > Date: Mon, 06 May 2002 17:59:34 -0000 > From: "cxpowell" <[EMAIL PROTECTED]> > To: [EMAIL PROTECTED] > > DERIVATIVES MAY BE THE REAL BOMB > > By Thom Calandra > www.cbs.marketwatch.com > May 6, 2002 > > SAN FRANCISCO (CBS.MW) -- Berkshire Hathaway's Buffett is > an insurance executive, so he's entitled to talk about risk from > nuclear bombs. > > Why shouldn't he? Palestinian supporter Sultan Abul-Aynayn > not so long ago was quoted as saying, "If one hair on the head > of Yasser Arafat is harmed, the U.S. had better protect its > interests around the world. We are not like Osama bin Laden, > but we have our own style of response." > > That's "a chilling warning," says James Dines, editor of > pro-gold The Dines Letter in California. "Should the safety of > all Americans depend on Ariel Sharon's decision whether or > not to kill Arafat?" Sharon was in Washington on Monday, > headed to the White House. > > But Warren Buffett, the world's second richest person, also > talks about derivatives. He and his right-hand man rate > derivatives somewhere below sewage. As the head of a > large, multi-billion-dollar enterprise, Buffett and his partner, > Charles Munger, are qualified to talk about the use of > options, futures, lending, leverage and other practices > known commonly as "derivatives." > > Buffett figures derivatives will mess up lots of companies. > Berkshire Hathaway's reinsurance unit, General Re, is > registering some losses as it closes the loop on derivatives > contracts. Munger was quoted this weekend, at the annual > Buffett-fest, as saying, "To say derivative accounting in > America is in the sewer is an insult to sewage." > > That would make Dell Computer (DELL), in a $1 billion-plus > derivatives boo-boo, an insult to sewage. > > That would make scores of companies that take > off-balance-sheet hits to earnings because of their > once-fancy artificial hedges, joint ventures and extreme > leverage -- an insult to sewage. > > Those derivative tangles include, in a strange twist of > fate, a few hedged gold companies. The gold sector is > among the North American stock market's biggest gainers > this year. > > John C. Doody, editor of the numbers-crunching Gold Stock > Analyst newsletter, figures Barrick Gold in its latest reported > quarter saw the mark-to-market value of its so-called hedge > book drop to a negative $121 million as of March 31 from a > positive $380 million on June 30, 2001. > > Barrick, one of the world's largest bullion miners, uses > written "call" option contracts and other derivative devices > and gold lending practices to enhance the price it gets for > its ounces of gold. The so-called hedging in the > "spot-deferred market" works well when gold is flat or down > in price, not so well when gold prices are rising, as they are > now. > > Doody at Gold Stock Analyst puts the negative swing of the > company's hedge book at $507 million. "This swing far > offsets the net profits earned of $46 mil in the first quarter of > 2002 plus the $66 million in the third quarter of 2001 plus the > $82 million in the fourth quarter of 2001. The net is a loss of > $313 million." > > In a conference call last week, Barrick's executives assured > questioning Wall Street analysts, who asked numerous > questions about the company's gold-hedging, they were > monitoring the situation. Yet some observers are not > convinced. > > "The sensitivity of the derivative portfolio now stands at > about $21 an ounce," says Douglas Pollitt at Pollitt & Co. > in Toronto. "Each $1 an ounce upward move in the gold > price sees the mark-to-market (of Barrick's derivative > contracts) drop by about $21 million. At $350 an ounce, > the mark-to-market would be over $1 billion in the red." > > Gold prices this year have risen to $312 an ounce from > $270 at the start of January. > > Pollitt calculates the notional value of Barrick's > spot-deferred contracts at 18 million ounces. "Add to this > another 5 million in written call options, (which the company > now calls 'variable priced sales contracts'), and, one way > or another, the company is short about 23 million ounces > of gold. This is a fantastic number and begs the question: > Could Barrick cover even if they wanted to?" > > CBS MarketWatch placed a call to Barrick's Toronto > headquarters on Monday regarding the company's > exposure to the hedged market and was awaiting a > response. > > The writer of a call option is giving the purchaser of that > contract the right to buy something, in this case gold, at > a strike price written in the contract. In exchange, the writer > of the option receives a little money, a premium. The > strategy for selling a call option is usually to enhance the > value of a security or a commodity when the investment is > declining in price, something that had been happening to > gold for years, until January. > > Barrick, to its credit, said in its report to investors that > it will reduce exposure to hedging this year. The Toronto > company, world's second largest gold producer after > Newmont Mining, says it earned $46 million for the March > quarter, down from $87 million in the year-ago three-month > period. > > Barrick, according to its quarterly report, sold half its gold > in the spot-deferred market for $365 an ounce. The fact that > it sold the other half in the spot market was a first for the > company. Barrick stated it expects half its gold for the > remainder of the year to be sold in the spot market, where > an ounce of gold is attached to no derivatives and gets > exactly what the spot market is dictating for bullion. > > Barrick also estimates that for every $25 increase in the > gold price, the company's annual earnings and cash flow > rise by approximately $70 million. "In total, 22 percent of > reserves, or 18 million ounces, are sold forward using > spot-deferred contracts at an average minimum price of > $344 per ounce, deliverable at the company's option > over the next 15 years," the company stated to investors. > "This position is down from 18.2 million ounces in the last > quarter of 2001 at an average price of $365 an ounce." > > Of course, if gold prices were to shoot far higher, in rapid > fashion, Barrick, as a writer of call options, could find itself > required to deliver gold to buyers at prices that are below > the spot price of gold. Other distortions of the gold market > are possible in a gold rally. > > Pollitt, the Toronto analyst, says theory and reality are like > night and day. "Converting dollars into gold is quite different > than converting gold into dollars," he said Monday morning. > "When the dreaded yellow metal was in the doldrums and > nobody cared, well, Barrick might have had a way out. But > now? Now you've got good company on the bid, now > you've got all those dollars chasing what little gold is left. > And any whiff that Barrick had stepped into the ring looking > for 23 million ounces would set the market ablaze." > > Large gold producer Anglogold in South Africa this year > said it would continue to reduce its reliance on the > forward-sale, or hedging, of its gold production. > Non-hedged gold miners, led by Gold Fields of South > Africa, have seen their stocks outpace the gains of hedgers > Barrick and Anglogold by wide margins this year. Gold > Fields, its shares poised to shift to the New York Stock > Exchange on Thursday, is up almost 175 percent this > year vs. a 30 percent stock price gain for Barrick and > 60 percent for Anglogold. > > The use of derivatives in many different forms has > supporters, lukewarm and otherwise. Federal Reserve > Chairman Alan Greenspan in February testimony said > derivatives have "contributed to the development of a > far more flexible and efficient financial system." > > Greenspan was not referring to any particular industry, > like waste management. Those sewers are best left to > derivative accountants, Buffett and Munger would say. > > -END- > > ------------------------ Yahoo! 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