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"May I come into your parlor?"
- said the fly to the spider.
by Professor von Braun
July 1st, 2001
If you were a Homestake shareholder, having purchased these shares because they were a non-hedged gold producer, you certainly received an unpleasant surprise last Monday. It seems that the Homestake CEO could not sell his company quick enough. For Barrick's CEO, a Mr. Randall Elephant, who must have been delighted, perhaps Christmas did come early this year.
Owning shares in mining companies is a risky business these days, as you never really know what the senior management is up to. As we have said before, one is better off owning bullion, rather than risking one's capital in a market arena that can be full of surprises, most of them negative in outcome. The poor old shareholder is often the last to know what's going on and usually ends up owning wallpaper material.
The world of gold mining stocks is getting smaller and smaller. Getchell Gold has gone, as has Battle Mountain Gold, now Homestake, Alta Gold went under, and Franco Nevada gave its producing mine to an Australian company in return for a large supply of wallpaper material. Rumors abound about Newmont as well, but they appear to not have been prompted into action by the closing of the pooling window that put such a sense of urgency in Homestake's senior management. Unless of course the party they may have been talking to decided they too were at risk.
What is left of the various gold funds and their respective management should find it relatively simple to decide where to put the money they manage as the choices are getting less and less. There is the likelihood of more downside surprises as this 21- year bear market enters its final phase.
With gold at $270 an ounce most mining companies are in serious trouble. The actual cost of production, as opposed to the cash cost that is announced, is considerably higher than $270. There is debt servicing, head office expenses, reserve replacement, etc. This is where the problem lies, there is not enough of a profit to go round and it is only a matter of time before something gives. It is indeed a strange world when gold production has become a liability.
What seems to go unnoticed is the fact that most of these companies have investment bankers advising them and one wonders as to who was advising Homestake? Was it somebody friendly to Barrick? Letting an investment banker have access to your books is a bit like putting the bank robber in charge of the vault. It's them that are indirectly responsible for the gold market and the conditions that have created this dismal market.
Should there be a massive short position in terms of gold that has been borrowed from the Central Banks and sold into the market, well what better way to cover one's derriere than to secure existing gold production by way of putting it under the nominal control of as few owners as possible. Let's go global and secure US, South African and Australian gold production just in case we need it may be the driving thought behind the "how do we get our gold back" question that at least one Central Banker has raised.
Market conditions such as what we are seeing can do strange things to the thinking of senior management and I am sure that they are clutching at straws at present. They appear to be just ripe enough for a modern day version of Henry Morgan the pirate, a well-dressed investment banker, to walk in the door and charge them exorbitant sums for "advice" about what to do. Without of course ever telling the poor old gold mining CEO what the real plan is here.
Any farmer knows that prior to sending the sheep to market, it is best that one puts the sheep in a pen first. And one pen is better than two, or three.
It will not be long before nearly all US gold production is under the control of three or four companies. That's a large chunk of world production with only a small portion of it US owned.
The real question is who is advising these companies and whoever they are, what if any is the size of their gold related derivative portfolios. One suspects that mine production and mine reserves are being looked at for reasons other than to benefit shareholders. After all, spiders do eat spiders.
The Prof can be contacted by email at firstname.lastname@example.org
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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