Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
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 [1] 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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