OT: Some unlucky mining companies got burned by surging gold pricegreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
From AP: 10/7/99 -- 3:40 PM
Some unlucky mining companies got burned by surging gold price
LONDON (AP) - The extraordinary rebound in gold prices in recent days is claiming some unlikely victims - a few of the gold mining companies themselves.
Ashanti Goldfields Co. Ltd. won a reprieve this week when creditors agreed to give it time to come up with some $270 million in additional collateral for risky bets that gold would remain depressed.
With 23 million ounces in gold reserves, Ashanti should be profiting handsomely from the skyrocketing price for gold.
Instead, the Ghana-based company is strapped for funds, thanks to its unfortunate decision to hedge its bets by committing 40 percent of its reserves against an anticipated decrease in price. It will have to buy or borrow gold to meet its commitment.
Ashanti isn't the only producer to have placed bad bets.
Industry analysts say hedging decisions by Cambior Inc., a Canadian mining firm, will cost it more than $30 million if gold prices stay at current levels. An Australian company, Sons of Gwalia, hedged all of its gold reserves and stands to suffer accordingly.
``It's quite ironic,'' Philip Klapwijk of the precious metals consultancy Gold Fields Mineral Services Ltd., said Thursday. ``It's not unalloyed joy that the price has gone up.''
Until two weeks ago, gold producers were slashing costs just to survive. World prices for the metal fell to 20-year lows, flirting with $250 a troy ounce, after Britain's Treasury announced in May that it would sell much of its gold reserves and replace them with securities offering a higher yield.
But gold prices reversed course abruptly after 15 European central banks announced on Sept. 26 that they would limit their combined sales of bullion to 400 tons per year for five years.
Prices responded immediately, rising by 30 percent in less than two weeks. Gold was trading late Thursday in London at $322.50 a troy ounce and contracts for October delivery closed at $322.80 later on the New York Mercantile Exchange. Most mining companies have seen their inventories and share prices grow in value along with prices.
``It certainly wasn't a sequence of events we anticipated,'' said Kelvin Williams, executive director of the world's largest gold mining company, Anglo Gold Ltd. of South Africa.
Speaking Thursday from his office in Johannesburg, he added: ``We're enormously pleased.''
Not so Ashanti Goldfields, which had gambled that prices would continue their slide. Before the recent run-up in prices, it locked in the value of 40 percent of its reserves with contracts to sell them at a fixed price at a future date.
But as the rising price for gold approached and then exceeded the prices Ashanti had contracted to sell at, the company saw the paper profits in its so-called hedge book turn to losses. And the banks that had lent the company money to buy those hedging contracts on margin began asking for cash as collateral.
Ashanti, which was trading above $10 a share last week, lost 25 percent of its value on Wednesday and was down an additional 3 percent Thursday on the New York Stock Exchange, where it was off 12 1/2 cents in afternoon trading at $4 a share.
``What we have done in recent days is to buy sufficient time to enable us to restructure ... to ride out any problems that have come about as a result of the spike'' in price, said James Anaman, Ashanti's general manager in Accra, Ghana.
Anaman said Ashanti had ``stress-tested'' its hedged inventories to make sure they would remain profitable even if gold prices fluctuated by up to $50 an ounce. But it wasn't prepared for what actually happened.
``Nobody expected a spike of $70,'' he said in a telephone interview.
Klapwijk, the London consultant, suggested that Ashanti is a special case due to its large margin calls. The banks that financed Ashanti's activities also are vulnerable, he said - hence their decision not to call loans they knew the company could not readily repay.
But other gold producers may soon share Ashanti's distress.
``I think clearly there will be a large number of companies whose hedge books are underwater,'' Klapwijk said.
Cambior of Canada holds futures contracts requiring it to sell 912,000 ounces of gold at $287 an ounce, all by the end of this year, said Roger Chaplin, director of research at T. Hoare Canaccord, a London-based brokerage specializing in precious metals.
Because Cambior will have to buy or borrow gold at spot prices to honor those contracts, that means Cambior faces a potential loss of $35.50 an ounce, or $32.4 million, at current gold prices.
In Australia, Sons of Gwalia was so confident prices would fall that it hedged 113 percent of the value of its total reserves, said Mike Jones, a mining analyst at T. Hoare Canaccord.
The company will likely face severe losses when it has to enter the spot market to honor its ill-timed sales contracts.
``There are several companies with substantial hedge positions,'' Jones said, and ``friendly bank managers'' deserve some of the blame.
Copyright 1999 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
-- Shelia (Shelia@active-stream.com), October 07, 1999
"Know thy hedge"
"Nobody expected a spike of $70" Just wait til its over with buddy.
-- David Lee Roth (Diver Down@Van Halen.ou812), October 07, 1999.
It seems clear that a lot of gold mines are effected by this. The AUX has gone down over 3% yesterday and today while the price of gold itself has barely crept down.
For those of use who bought both metal and stocks.....DOHHHHH!
-- David Palm (firstname.lastname@example.org), October 07, 1999.
David, and David,
I blindly bought options in XAU early this week. I think they increased on Tues. but haven't checked since.
Can either or you or anyone else, tell me which mines are included in this group (XAU)
If Gwalia, Cambior and Ashanti are heavy members should I get out early?
Scarecrow (if I only had a brain)
-- Scarecrow (email@example.com), October 07, 1999.
You should never have listened to this bunch of amateurs in the first place.
-- (TINman@OZ.com), October 07, 1999.
I bopught on the advice of my "heavy-duty" broker. The same one who told me not to buy into Pan American Silver before the run this week.
This bunch of amateurs has been in the money more times than not.
You can listen to the talking heads on TV, if that's what you trust. I can afford Paine Webber's commissions, but I'm not sure I can afford their advice.
(if I only had a brain)
-- Scarecrow (firstname.lastname@example.org), October 07, 1999.
The big question is will Ashanti be out of the woods after the Oct hedge? What if any did they bet on Nov-Dec and beyond?
-- a (email@example.com), October 07, 1999.
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-- Stan Faryna (firstname.lastname@example.org), October 07, 1999.
"unlucky"?!? uh... Pardon me, but if a mine, person, bank, or whatever is depending on "luck" to make their short or long position viable, they are going to need a LOT of luck. sheesh....
Who was it that said, "The first sign of a declining civilization is the death of (accuracy in) language."?
-- Ken Seger (email@example.com), October 12, 1999.