Gold at $500 per ounce

scriabinop23 · Dec 25, 2008

Gold is for sissies.

I thought this is a trader board where you guys look for vol. No vol in gold.

At least lets consider silver...

Or ...

Rhodium is where the action is at.
Only 800oz produced per year annually.

thriftybob · Dec 25, 2008

Quote from number22:

A lot of gold mines cost basis around $450 (inflation adjusted in 2007).

If they did, they'd have made a LOT of money in 2008, and none did that I recall, even the quarter when it hit $1000.

Look at Goldcorp or Agnico-Eagle, even. They brag about their low costs, yet are only able to make pennies a share when gold was at all time highs. At $450 maybe they might be one of the few still digging, just to stay alive and employed, but with no profit in it.

Read their financial filings with regards to the effects of low prices on base metals like copper, zinc, and lead with respect to how that affects their cost for mining gold.

talknet · Dec 25, 2008

Quote from thriftybob:

At $450 maybe they might be one of the few still digging, just to stay alive and employed, but with no profit in it.

Cost of gold production is far less than $450. Gold miners earn good profits at $450.

thriftybob · Dec 25, 2008

Quote from talknet:

Cost of gold production is far less than $450. Gold miners earn good profits at $450.

Ok, name one, LOL.

You might want to look at their 10q before typing.

Agnico-Eagles bad qtr was as result of low zinc and copper prices for example.

scriabinop23 · Dec 25, 2008

Quote from thriftybob:

Ok, name one, LOL.

You might want to look at their 10q before typing.

Agnico-Eagles bad qtr was as result of low zinc and copper prices for example.

ABX I believe is in the 300s in many of their mines. Furthermore, below $40 crude and deflationary wage pressure should be very helpful. But I assume that doesn't factor in opex.

thriftybob · Dec 25, 2008

Quote from scriabinop23:

ABX I believe is in the 300s in many of their mines. Furthermore, below $40 crude and deflationary wage pressure should be very helpful.

Good choice. Better than almost all others except GG and AEM.

Barrick's CASH cost was $466/oz last qtr. That doesn't include the costs to buy the land, explore, build the mine, equip it with trucks, build a mill, finance it, or pay any overhead salaries or administration. They made 11 cents last qtr before special items with avg selling price of gold at $867.

They have 9.5 million oz of gold sold forward around $400 or $425 as I recall, but its all accounted for in their projects, so it won't affect costs until those projects start producing, at which point they will have to show the approx $5 billion loss on them being carried as part of the value of those projects, now.

The wonders of accounting never cease...

scriabinop23 · Dec 25, 2008

They have 9.5 million oz of gold sold forward around $400 or $425 as I recall, but its all accounted for in their projects, so it won't affect costs until those projects start producing, at which point they will have to show the approx $5 billion loss on them being carried as part of the value of those projects, now.

The wonders of accounting never cease... [/B]

Take a look at this:

Key Terms of Gold and Silver Sales Contracts
In all of our MTAs, which govern the terms of gold
and silver sales contracts with our 18 counterparties,
the following applies.
The counterparties do not have unilateral and
discretionary âright to breakâ provisions.
There are no credit downgrade provisions.
We are not subject to any margin calls, regardless
of the price of gold or silver.
We have the right to settle our gold and silver sales
contracts on two days notice at any time during
the life of the contracts, or keep these forward gold
and silver sales contracts outstanding for up to
10 years.
At our option, we can sell gold or silver at the
market price or the contract price, whichever is
higher, up to the termination date of the contracts
(currently 2017 in most cases).

From page 64 of the annual report.
http://www.barrick.com/Theme/Barrick/files/docs_annual/2007 Annual Report - English - 3.pdf

That boldfaced point seems to contradict the whole outright 'short' derivative position they are carrying.

I need to read more. Any thoughts.

dhpar · Dec 25, 2008

good posts thriftybob but i guess you are talking to a wall - most people here don't know what "cash costs" mean to start with...

thriftybob · Dec 25, 2008

Quote from scriabinop23:

Take a look at this:

Key Terms of Gold and Silver Sales Contracts
In all of our MTAs, which govern the terms of gold
and silver sales contracts with our 18 counterparties,
the following applies.
The counterparties do not have unilateral and
discretionary âright to breakâ provisions.
There are no credit downgrade provisions.
We are not subject to any margin calls, regardless
of the price of gold or silver.
We have the right to settle our gold and silver sales
contracts on two days notice at any time during
the life of the contracts, or keep these forward gold
and silver sales contracts outstanding for up to
10 years.
At our option, we can sell gold or silver at the
market price or the contract price, whichever is
higher, up to the termination date of the contracts
(currently 2017 in most cases).

From page 64 of the annual report.
http://www.barrick.com/Theme/Barrick/files/docs_annual/2007 Annual Report - English - 3.pdf

That boldfaced point seems to contradict the whole outright 'short' derivative position they are carrying.

I need to read more. Any thoughts.

Yeah, 9.5 mm oz is a heck of a lot of gold, no matter the terms. I think its like 40 or 50% of the gold reserves in those projects. I see it as a kick the can game, and I don't like their not booking that $5 billion loss on the income statement, because I know it will eventually raise the cost of mining the gold.

scriabinop23 · Dec 25, 2008

Quote from thriftybob:

Yeah, 9.5 mm oz is a heck of a lot of gold, no matter the terms. I think its like 40 or 50% of the gold reserves in those projects. I see it as a kick the can game, and I don't like their not booking that $5 billion loss on the income statement, because I know it will eventually raise the cost of mining the gold.

Yea but did you see my point: they have the right to sell the gold at higher than the ~$435-450 price if market price is higher. I haven't read all the details of this structure, but it just looks like a method they've secured their financing. The way it reads (what I boldfaced), it looks like they are holding 95000 (100 oz denominated) OTC gold put contracts with average maturity about 5-6 yrs out, at strike price of mid 400s...

Why should they book the loss if:

#1) $450 is at or above their cost of production and they have sufficient cash reserves.
#2) In their agreements, they have agreed to never be vulnerable to margin call risk.

Since #2 is the case, there is no cashflow or collateral risk (margin posting not required), so I don't see why they should mark to market. I assume they are already depressing the value of the assets correlated to this hedge loss.

But my point is the hedge loss is in itself at odds with that wording I just boldfaced. So looks just like a source of ambiguity, or perhaps the wording was incorrectly written.