To Hedge In a Hand Basket
by Rob Kirby, Kirby Analytics. September 11, 2006
Businesses who ply their trade in the extractive or natural resource industry have historically been subject to the ups and downs of the business cycle – hence they've long been, collectively, branded "cyclical stocks."
Junior exploration and resource companies fulfill the function of prospecting or discovering identifiable new resources to mine. Call this "grunt work" if you will.
Miners and their Hedge Books have been in the news a great deal lately.
Miners have been making news because the sector has been consolidating. Consolidation amongst the miners has stemmed from takeovers and mergers amongst the base metals producers like Inco and Falconbridge, for example, to the precious metals producers too – ones like Goldcorp/Glamis, Barrick/Placer and more recently Barrick's hostile attempted takeover of Nova Gold. The motivation for this rash of consolidations has been sparked by rising prices for the commodities in question, increased production or run rates to benefit from these higher prices and the inevitable resulting race-to-replace diminishing, finite reserves in the ground. "Cheap and easy money" has made it more attractive to buy and finance existing proven resources than to bother working-for-a-living and actually finding new resources.
This should come as no surprise to most; there are parallels. The moral equivalent is evidenced daily with the proliferation of Texas Hold'em Poker on T.V., which has been elevated to the status of "sport" – with anxious card holders sweating over bad cards - through its overwhelming invasion of all North American sports channels.
Why bother to break a sweat when some good ole fashioned service [watching, concentration, etc.] will suffice, ehhh?
Recently, inordinate attention has been paid to miner's Hedge Books. One well documented, highly publicized case – Barrick Gold Corp. – sports a "hedge position" which is short physical gold bullion, that, speaking of bad cards - by some estimates has been "off-side" [underwater but "unrealized" losses for accounting purposes] to the tune of 3 billion dollars.
This hedge position was ostensibly put in place to appease banker's[?] concerns and "allegedly" entered into to mitigate risk. That such a losing position would be allowed to "fester" to such unimaginable proportions tends to give new meaning to genesis of the word Barrick, which Dr. Antal Fekete so aptly described in his recent illuminating piece titled, To Barrick or to be Barricked, That is the Question (see link).
Apart from appeasing friendly bankers, if we're to believe Dr. Fekete, it would appear that Barrick's hedge position has left a "foul taste" [or a foul smell, perhaps?] in the mouths of some interested parties.
A Foul Smell Indeed
In fact, Barrick's hostile bid for Nova Gold has so rankled some in the gold world, namely GATA – that they have rallied to support Nova Gold and have even gone public urging Nova shareholders to reject Barrick's hostile takeover bid,
"GATA urged NovaGold shareholders, in an August 14 news release, 'not to tender their shares to Barrick before Barrick closes its short position in gold.' The organization said that Barrick's alleged short position of about 12 million ounces of gold long has been a major suppressing force against the gold price and against the price of gold mining shares."
Don't hedges work well?
For the uninformed or the uninitiated, it might do well to remember that even perfect hedges are often "thorny places" which may pose danger to unsuspecting trespassers [or would be shareholders too, perhaps?].
Today's market was rightly overshadowed by 5th anniversary ceremonies remembering the events of 9/11. Best and well wishes to all those hurt and equally to those still suffering great loss.
Overseas equities began the week on a sour note with Japan's Nikkei Index giving up 286 to close at 15,794. North American Markets [with the exception of the Toronto Stock Exchange which was beaten with a stick] fared better with the DOW ahead 4.73 to 11,396.84, the NASDAQ up 7.50 to 2,173.30 and the S & P gaining .65 to close at 1,299.55. NYMEX crude oil futures fell .64 to end the day at 65.44 per barrel.
In foreign exchange, the U.S. Dollar Index was marginally off, falling .11 to 85.85.
The interest rate complex saw rates rise about 4 basis points across the board with the benchmark 2-year bond ending the day at 4.84%, the 5-year at 4.74% and the 10-year at 4.89%.
The precious metals complex was nuked. COMEX gold futures were hammered to the tune of 19.10 to close at 592.10 per ounce while COMEX silver was annihilated to the tune of 1.05 to end the day at 11.17 per ounce. The XAU was beaten up 9.90 to 130.92 while the HUI was slaughtered 25.62 to close at 312.35.
On tap for tomorrow, if the sun comes up, at 8:30 a.m. we can expect to be treated to July Trade Balance data – expected -65.0B vs. prior -64.8B.
Wishing you all a stiff drink, a pleasant evening and no hangover tomorrow!
© 2006 Rob Kirby