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Posts Tagged ‘Barrick’



   Posted by: Mr. Gold    in Uncategorized

It is hard to fathom the rationale behind Barrick’s juicy premium for EQN. It was only 18 months ago that Barrick, with much fanfare, “left Africa”, leaving behind a limping offshoot (African Barrick), unloved by the London market, deprived of any growth story, plagued with 70% overhang on the stock, hemorrhaging talent and serving few fund managers except those seeking a proxy for “Tanzania risk”.

So now, Barrick is back on the black continent and in search of copper (well, much is being said about copper, but there is uranium there too). Barrick’s Zaldivar and Cerro Casale projects provide a significant copper element to the stable, even though the impact is less visible than in the case of, say, Newcrest or even Newmont. But Lumwana? Granted, EQN will increase production from its flagship operation by about 100kt of copper between now and 2014, but the new owner will have to throw in $0.5bn in capex over and above the $7bn plus in cash splurged on the Australian/Canadian listed producer. Barrick also gets access to the dubious charms of Jabal Sayid – a 60ktpa early stage development project in Saudi Arabia. One wonders if Barrick’s portfolio risk is not getting a little too exposed to a region plagued by uncertainty and (at least perceptions of) instability. The company is already involved in Reko Diq project in Pakistan – sharing the burden with the most unlikely of guests, Chile’s Antofagasta.

True, EQN will spit out $1.3bn in Ebitda as early as 2013, assuming the nominal copper prices around $4/lb. Should the USD continue on its trajectory post FOMC meeting in June, this looks like a great USD hedge, but the real value of the red metal may not shine so brightly for anyone whose wealth is denominated in stronger currencies than the USD.

This rationale is probably the only common thread between the gold and copper markets. The red metal is driven by a completely different set of drivers, some of which are of discretionary, administrative nature. One could even argue that after years of guesswork on central banks’ intentions regarding gold reserves, it is now copper that suffers from increased opacity. Any attempts to penetrate the great wall of secrecy regarding copper hoarding at China’s State Reserve Bureau are bound to be frustrated. And even the estimates of unregistered stocks in bonded warehouses range from 0.5mt to over a million tonnes – a significant range in a 19mtpa market. Barrick’s move represents therefore a leap of faith, as no meaningful due diligence can be made regarding the distant future of the copper market, beside the well worn (and still valid) argument of China’s copper deficiency. But industrial metal demand growth rates could be past their peak and it is illustrative that no base metal producer tried to dislodge Minmetals’ original bid.

Andrew Michelmore – Minmetals’ CEO had seen worse times at OZ Minerals and it is difficult to disagree that walking away was the most rational of options. But from a broader perspective, this adventure amounts to yet another failure of a Chinese-funded entity to secure a stake in a Western-operated mining venture. In certain quarters of Chinese metal value chain, belligerent calls intensify. China’s steel association’s vociferous attacks on Western governments’ (!) monopoly in iron ore production is an unfortunate example of just how political the quest for “equity” participation in offshore commodity production has become. Chinese entities are still light years behind the hugely successful, long-term metal bets Mitsubishi and other Japanese shosha companies engineered in Australia and South America four decades ago.

This leaves us with the Barrick’s murky rationale (the sale could not possible premeditated on doing in the hapless African Barrick, there are cheaper ways to do this). The company’s speedy due diligence may reflect as much its nimble approach to growth as an unwelcome rashness. Or maybe Peter Tomsett – EQN’s chairman had ulterior motives? Here’s the guy to six years ago successfully brought Placer Dome’s history to its end. When Barrick made the initial approach, Tomsett remained open to an alternative bid. Newmont and AngloGold Ashanti embarked on an in-depth due diligence of PDG’s assets, until AngloGold’s visit to Porgera went badly wrong. Barrick digested Placer Dome awright and has thrived since.

Smell a revenge?

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   Posted by: Mr. Gold    in Uncategorized

Only gold market veterans still remember the jovial hectoring socked onto gold mining executives by the late Julian Baring of Mercury Asset Management. Baring – in his days the most successful gold investor – spent the late 1990s castigating gold mining companies for selling gold forward. Baring’s tirades fell mostly on deaf ears but the miners soon rued their studious indifference. Famously, Ashanti – the chief victim of Baring’s verbal prowess – soon caved in under the weight of the margin calls when the sudden spike in the gold prices squeezed their positions.

AngloGold Ashanti’s closure of the hedgebook last week ends the nearly 20 years’ legacy of mining companies’ activity in the gold lending market. Skeptics believe that this could be a contrarian signal for the gold market and that the lack of accelerated buying from the miners closing their hedgebooks will remove one of the key supports under the physical flows. Arguably, net de-hedging did help to provide additional demand for gold since the last quarter of 2001, or roughly since the 10-year long bull market began. Yet the hedging and de-hedging decisions are about producers’ expectations of the future demand for their product – and the environment today could not be more different from the 1990s.

The mechanics of gold hedging was simple. Producers would borrow gold today against future production expectations. This borrowed metal was sold and the proceeds were reinvested into risk free rate instruments. To close the contract, the miner had to deliver the borrowed bullion back to the lender and the risk free instruments (e.g. Treasuries) were sold. The receipts from these instruments were effectively the revenue for the mined ounces. Naturally, this only made sense when the sovereign interest rates were way above the expectations of future gold prices. Today, this feels like stone age. But it was the market reality of the roaring 1990s.

Historically, there were three reasons why gold producers’ output was partly hedged – in reverse order of importance: acquisitions, project financing and strategic revenue security. First, during the ongoing consolidation, many smaller producers were acquired by larger rivals. Although the larger players could more easily diversify their risks, small and mid-size companies often could not secure the financing without the commitment to sell the product at a predictable price. These legacies soured revenues of companies which eventually acquired Ashanti or Bema. The other type of hedges was, precisely, related to project financing. Banks could de-risk support for capital-intensive projects in frontier markets if at least part of the future cash flow was guaranteed. Yet the timing and structure of these hedges oftentimes clashed with the strategic planning of the mining companies and their treasury departments. This is because the latter engaged in the third – and much larger – form of program hedging. Since the gold price was fixed, the value of these products depended on the combination of the interest rates and gold lease rates. The former were usually fixed, the latter most often floating – at least since the new accounting standards were introduced in 2001, pruning interest in hitherto successful spot deferred contracts.

Options were also used extensively. Less abstruse than the negotiated forwards, options focused investors’ attention on the so-called “committed” and “protected” ounces. There was, supposedly, more comfort with the latter than the former. Yet the complexity of the hedgebook’s overall architecture flummoxed even sophisticated analysts. I often found that a combination of short puts and forwards was not adequately appreciated as a cost-efficient alternative to close out parts of the book. In response, miners endeavored to concentrate the market’s attention on the delta of the hedgebook, rather than committed/protected ounces. Unfortunately, this measure of the book’s near term sensitivity to gold price’s movements was dependent on too many variables (spot prices, interest rates, volatilities) for most investors to be able to project the marked-to-market value of the book.

At the antipodes of Julian Baring’s principled harangues, there was the fragmented Australian mining industry. Aussie executives did not engage in the debate about hedging. They simply did it, without much pressure from the local, somewhat isolated investor base. On the other hand, Barrick’s wiz-kids embarked on roadshows trying to educate investors about the more arcane aspects of the book, which peaked at 20m ounces in 2001. Newmont famously dipped a toe into the hedge world at all-time low gold prices. And AngloGold – whose hands were tied by the commitment to pay dividends to Anglo American Plc – had to insist on the maintenance of revenue security, and endure investors’ wrath or indifference as a result.

All of this is now a closed chapter. Barrick bit the bullet in 3Q2009, charging $5.7bn to its earnings in the process. AngloGold Ashanti has now accelerated the demise of its one hedge, at a cost of $2.7bn. Both transactions were, arguably, accretive on NAV basis. Among the majors, only Kinross still has to battle with the legacy positions inherited from Bema’s takeover.

The end to net growth of gold hedging ushered us unheralded into a new gold market in 2001. It will be worth considering whether the end of de-hedging also marks the beginning of a new era.

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