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« Has the Gulf Spill Opened Pandora’s Box for Obama? | Main | Save the Virgins! »
Monday
Jul122010

Barrick Gold Corporation and Goldcorp Incorporated Hedging Silver

SLW Silver Streams 12 July 2010.jpg

The following is a comment received from one our readers regarding Barrick Gold Corporation (ABX) and Goldcorp Incorporated (GG) regarding their agreements with Silver Wheaton Corporation (SLW) to forward sell their silver and reads as below:

What I do not understand is why companies like Barrick and Goldcorp would enter into an agreement with SLW. Both of these companies can surely borrow the amounts of money that SLW pays them in advance for this agreement to sell SLW silver at prices around $3.90 per oz. I was told that there was a benefit to Barrick and Goldcorp to enter into these kinds of contracts with SLW because there is no dilution of stock values with this type of capital raising.

Am I missing something here or is this type of business model sound and I think more importantly is this a type of business plan that will be renewed and thus remain a viable business model into the future. As I understand it this is hedging on the part of Barrick and Goldcorp.

Tom


Now, as we can see from the above chart taken from Silver Wheaton's web site, which shows the extent of their involvement in terms of their willingness to forward sell their silver production. It puzzles us that companies of this size would need to do this, after all Barrick has a market capitalization of $42.90 billion and Goldcorp is no small fry with a market capitalization $30.52 billion. Barrick has recently come to the party in terms of unwinding its hedge book on gold, however, it did take them a long time to do so. The decision to accept an upfront payment plus $3.90/oz for their silver production reminds us of someone playing chess who takes a pawn because he was able to, but eventually loses the game due to lack of vision. If silver prices fall apart then they will have made the right move. However, should silver prices find their stirrups and head north to say, $25.00/oz, then the stock price of Silver Wheaton will go ballistic as their costs are fixed but their profits are free to run.

Another minor irritation we have is that both Barrick and Goldcorp are listed in the gold bugs index known as the HUI. This index is often referred to as the index for unhedged producers IE those who do not forward sell their gold.

The description of the HUI being as follows:


The AMEX Gold BUGS(Basket of Unhedged Gold Stocks)Index represents a portfolio of 14 major gold mining companies. The Index is designed to give investors significant exposure to near term movements in gold prices - by including companies that do not hedge their gold production beyond 1 1/2 years.

We know that this index refers to gold producers and not silver producers but in our book if you hedge your product then you are a hedger, be it gold or silver.

We do need to point out that we do not own any stock in either Barrick or Goldcorp but we do own Silver Wheaton's stock. In our very humble opinion the Silver Wheaton business model is innovative and manages to avoid the risks inherent in any mining operation and we think that they have the better side of these transactions.

Have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

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Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

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Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

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Reader Comments (4)

Regardless of any hypotheses behind the intention of Goldcorp and Barrick to hedge their silver to SLW, this great for SLW in view of the current market conditions.

Depending on the expiry date of contract and I assume it a med to long term agreement, SLW could not agree to better insurance contract.

As I do not see Barrick/Goldcorp going bust in the next years (but who knows with that kind of contracts) and in view of Barrick's ability to quickly recover any hedging losses as evidenced by last year's deleveraging of a huge hedging position, there is nothing left as - WELL DONE SLW!

July 12, 2010 | Unregistered CommenterGernot

I am not clear on something about this forward selling deal with SLW. Does the agreement terminate at the will of the parties involved or is there a date specific for the time to end? Does anyone know how these contracts are written - do they vary or are the terms constant?
John

July 12, 2010 | Unregistered CommenterJohn Ell

John,

Yes, these contracts are slightly different, some are for the life of the mine, some stipulate a 20 year period, others take a % of the silver production of a mine. If you go to SLW web site and look for silver streams that will give you a list and the details of their suppliers.

Hope this helps.

July 12, 2010 | Unregistered CommenterGold Prices

John,

You could also use our search box at the bottom of the page to pull up all the articles we have posted about them, they go back a fair way.

July 12, 2010 | Unregistered CommenterGold Prices

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