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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary.
An Unanswered Question.
by Professor von Braun
March 11th, 2006
Currently, given the rising gold price, the gold mining industry
does not seem to be enjoying anything that resembles a resurgence
as it once did in the early eighties, a period that led to the
discovery of several new gold deposits. Instead we are hearing
of a shortage of new projects, of declining production, rising
costs and of little result-producing activity when it comes to
exploration.
Two companies, Barrick and Newmont, now account for 25% of all gold produced in the world today, and Canadian miners account for much of the gold production within Australia, the United States and Canada. It could be said that Canada, not South Africa, is now the largest gold producer in the world.
In turn these 'major' miners have share registers heavily influenced by mutual funds, not the strongest of hands, since they depend upon inflows of investors funds, have little option as to where to put these funds given the 'consolidations' of recent years, and little option as to whom to sell to should there be redemptions.
Takeovers and mergers have reduced the number of players within this industry considerably and I suspect it will get smaller still but not necessarily for the reasons given out by the companies themselves.
After all there is still the unexplained issue of hedge books and what to do with them in a rising gold market. Currently Barrick's mark-to-market liability is estimated by some analysts to be about $5 billion dollars -- a considerable sum. Certainly 18 million ounces, the amount hedged, is a lot of gold to deliver, even more so when rising energy prices are adding to production costs.
Now most industries would like to have bankers that allowed them to reschedule liabilities at will, which is what appears to be taking place when it comes to the apparent lack of margin calls one would expect with an often noted but never resolved increasing mark-to-market liability.
Then there is the unexplained withdrawal by long time player Rothschild and AIG from the London gold market in 2004 with Rothschild's seat going to Barclays and AIG's apparently going to Royal Bank of Canada.
In addition there is the recognition by commentators that there has been a shortfall in supply when it comes to satisfying demand for several years. This shortfall has been met with a supply of gold from somewhere other than official central bank sales. Reported forward sales by mining companies obviously accounts for some of this shortfall but these numbers are not enough to account for all of it.
So who is on the hook? Which central bank(s) have lent/leased their gold to bullion banks who in turn have sold it into a falling market with the intent of buying it back at lower prices only to have to deal with a reversal of prices and an actual increase in the demand for physical metal? Which bullion banks are on the other side of the hedging program Barrick touts as being so successful? Is there a plan by these bullion bankers to get that gold back at or in a different time frame to what Barrick has in mind?
Wouldn't that be something? But what's missing from the equation? Why Newmont of course! Should Barrick bid for Newmont at some stage and succeed the combined entity would account for 25% of all gold produced as well as having control of some of the largest gold reserves in the world. Hey presto -- there is the central bank gold back in the coffers once again.
Would Newmont reject such an offer? I imagine the management would but the offer would be targeted at shareholders and that means mutual funds. A review of the top 20 shareholders of both companies reveals that most of the funds that own Newmont also own Barrick, the notable exception perhaps being Fidelity Fund Management. I am sure that should this event occur, a sales pitch from Barrick and their investment bankers will target the synergies, the cost savings from reduced management, etc. At the end of the day it will be the bottom line shareholder value perception -- in this case fund performance, that likely motivates an acceptance.
Then a year or so out into an ongoing rising gold market enter the bullion bankers and it's goodbye shareholders. Is this an unlikely scenario? Well maybe, maybe not. But if you have 25% of total world gold production under one roof, much of it in 'safe' countries, coupled with an 18 million ounce hedge position and gold goes to $1000 per ounce that's going to dramatically increase the mark-to-market liability and how convenient it would be if there was only one door for the liability issuer to knock on.
Time will tell, but if Barrick ever announces a bid for Newmont it may be prudent to adopt a neutral stance until the issue of mark-to-market liability is clearly resolved.
The Prof can be contacted by email at profvonb2@aol.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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