Barrick Hedge Book

Perhaps the main hallmark to the decades-long price manipulation of silver has been the lack of competition between the big commercial dealers on the COMEX. For 20 years, these commercial dealers have acted as one in their dealings in COMEX silver. It's always the dealers, in unison, versus the technical funds. If the technical funds buy, the dealers sell. And vice-versa. Not for an instant am I trying to exonerate the role of the technical funds in this ongoing manipulation, but it should be obvious what motivates the funds, namely, a slavish (and moronic) addiction to mechanical price signals. And, as consistent losers to the dealers in virtually all their trades on the COMEX (including gold and copper), no one could ever accuse the funds as being the masterminds of the silver manipulation, since they are the suckers. At least we know why the funds behave the way they do. The same can hardly be said about the dealers. Why have the dealers always acted in unison? Certainly it can't be because of some official market-making role, since our commodity futures markets are structured, by law, as an open outcry auction system. It doesn’t grant the dealers any specialist function (as does the New York Stock Exchange). That the CFTC and COMEX management has turned a blind eye towards the dealers acting in unison is shameful. Even when presented with evidence of super-concentrated net short silver positions on the COMEX, far beyond what could be considered reasonable, the authorities have permitted the manipulation to continue. This is, obviously, something that the market will have to work out, with no assistance from the regulators. Recent evidence, however, suggests the market may be about to remedy the silver manipulation, and long overdue competition between the dealers may be developing. In the latest Commitments of Traders Report (COT), for positions held as of 3/4/03, there were some very unusual developments. There was a weekly decline in the total net short commercial position of roughly 4000 contracts, to about 39,500 contracts. This means the total net short position has declined by 35,000 contracts (175 million ounces) from a recent peak of roughly 75,000 contracts. Thus, once again, the dealers were able to cover a big chunk of their net short position, at the expense of the technical funds. But what was unusual, was that even though the total net short position of the commercials declined by 4000 contracts this past weekly reporting period, the 4 or less largest traders increased their net short position by 2500 contracts. Remarkably, the 8 or less traders' category (which obviously includes the 4 or less largest traders) showed a decline of 400 contracts. This means, mathematically, that some smaller traders in the 8 or less category bought back almost 3000 contracts. What this means to me, is that some commercials are abandoning the short side of silver, forcing and isolating the very largest traders to carry on the short manipulation by themselves. While I can't prove it (I could if there were more transparency), I think we're down to 1 or 2 very large commercial shorts who are maintaining the manipulation single-handedly. That is outrageous and something that the CFTC and the COMEX must be fully aware of, given that they compile these statistics. Shame on them. I know this is somewhat complicated, so let me restate what I'm saying. The COMEX, alone among all futures exchanges, has allowed the very largest traders to dominate price action, by virtue of a pattern of consistent concentration of positions not present on other exchanges. Some would argue that is the very definition of manipulation, with which I would agree. Now we are seeing evidence of a further concentration of an already super-concentrated short position in silver. How much more concentrated can you get? If my guess is correct, we're down to 1 or 2 big shorts rigging the silver market. That means the last remaining controlling short (or shorts) in COMEX silver is in a desperate situation. He is like a cornered rat. He is in a very dangerous position because his position is so vulnerable. That also makes him a danger to the market. His only hope is to engineer a sell-off, in which the technical funds will go short ten or twenty thousand contracts, and enable the cornered short to cover more of his short position. He may, or may not succeed, depending on the behavior of the other dealers, who were formerly in cahoots with the cornered king short. If they continue to desert the sinking short ship, and step ahead of the remaining short by continuing to buy, the king rat short will go down with the ship. If the tech funds can be tricked into going short, we go down in price temporarily, then roar back. It's black or white, but I'm not sure how it plays out short term. Long term is a no-brainer. What's so amazing is that we are talking about a still huge and concentrated short position in silver at stupid cheap prices. We see clear evidence that the big mining shorts (Barrick) don't want to be short here anymore. We have never seen any evidence of real silver backing the concentrated short position. If the CFTC ever awakens from their stupor, and asks the simple question, "who in their right mind would be short silver big, at these prices and conditions?", the jig would be up in a flash. Butler

A Very Interesting Trade By Theodore Butler I'd like to discuss a recent trade in COMEX silver options, that appears very interesting. The trade in question is the kind of speculation I occasionally do for myself. Mind you, the last thing I want to do is to encourage folks to speculate in silver. Speculation involves voluntarily embracing extra risk, above and beyond the normal risk of a prudent investment. This is not something most folks are suited for. Besides, the risk/reward ratio in owning real silver is so spectacular, that it is not necessary to juice up the transaction with leverage. But still, this trade caught my attention. Here are the facts of the trade, then I'll speculate on what it may mean. On Feb. 27 and 28, what looked to be a single buyer, initiated a purchase of over 6000 call options in the December 2003 option series. About 1500 were bought in the $6 strike price, and over 4500 were done in the $7 strike price. 6000 contracts equals 30 million ounces. The options expire on Nov. 24. The total premium paid, or cost, of the options was about $2 million. In my memory, this was the largest single option transaction in the 20 year history of the COMEX silver options market. Of course, the buyers and sellers are anonymous. An option, for those not familiar, is a derivatives contract that gives the buyer the right, but not the obligation, to purchase, in the case of a call (or sell in the case of a put), the underlying item, in this instance, a futures contract, at a predetermined price (the strike price) and until a specified date. If the price of the underlying item trades higher than the strike price before the expiration date, it has intrinsic value (the amount above the strike price, or the amount "in the money") and can be exercised into the underlying item or traded for the amount of the intrinsic value. All options, both in the money, and out of the money (no intrinsic value), have, in addition, a time premium built into the price. This time premium will decay, or evaporate, as the expiration date approaches, reaching zero on or before the expiration date. Entities selling option premium receive the proceeds upfront and get to keep the premium, if the options expires out of the money, and therefore are abandoned by the buyers. If the option trades in the money on or before expiration, the buyer can exercise, or convert, into the underlying item, which the option seller is obligated to provide. Sellers, and I say this only for illustration, are like the house in Las Vegas. Buyers are speculators or are like gamblers, looking to risk money in the hopes of an outsized gain. Now, let's speculate on the silver option transaction in question. Who were the entities, both the buyer and the sellers? Most likely, it was an institutional buyer, as there has not been retail participation of this magnitude in COMEX silver options previously. Two million dollars is a big bet that silver will be higher than $6 or $7 by Nov. 24. If silver doesn't reach those levels by Nov. 24, the sellers keep the buyer's $2 million. At the $7 strike price, that's a 50% move from current levels. Even if it is an institutional buyer, it may be that it's just a straight speculation by someone very bullish on silver (maybe he reads my articles). In that case, there's not much to be gleaned from the transaction, except what might happen if the trade moves into the money. By the way, it looks like the sellers are the usual entities that sell, or write, premium, since it was the buyer who initiated the transaction. The speculation gets interesting if the buyer was not speculating, but bought the options as protection against a silver price advance, because of an existing short position. For instance, Barrick Gold comes to mind. This is in the ballpark amount of what they said they were interested in financially settling. Or it could be one of the big concentrated commercials shorts who have been manipulating the silver market for years, and has decided to cover. In any event, since the trade makes sense to me, as a good speculation, it makes extra good sense as price protection to an existing short. While it's true that $2 million is a lot of money for an out of the money option, if silver crosses $6 or $7 by Nov. 24, it may not be a lot of money when compared to the profit an option position of this size (30 million ounces) could generate. At $10 per ounce, these options would be worth well over $100 million. If silver got to $15 by the end of November, the options would be worth $250 million dollars. Not bad for a $2 million bet. Or a $2 million insurance premium for an existing short. The main difference between a straight speculation and insurance protection, is that a speculator is likely to take profits and sell at some point, while the trade is likely to be left on longer if it’s insurance protection. No matter the motivation of the buyer, what will happen to the sellers if this trade runs from being deeply out of the money, into being in the money? Or put another way, as I wrote several months ago, did we just witness the passing of the short silver "Hot Potato" of 30 million ounces to the option sellers? If this trade does make it into the money (above $6 and $7, by Nov.), the option sellers will be in a world of hurt. Right now, at current levels, the exchange minimum margin requirement for each short out of the money call option is no more than $100 each, and maybe much, much less. (In addition to the premium received.) So, the sellers financed their collective short option position of 30 million ounces with an initial deposit of their own money of less than $600,000. If the price of silver crosses the strike prices during the life of the option, the sellers will be required to deposit $300,000 for every penny silver moves above the strike prices, or $30 million for every dollar. Or, they can buy back their short position, which is exactly my point - the financial pressure on these option sellers to buy back their shorts will merciless. The likelihood that these short sales are backed with real silver is almost nonexistent. If silver rises, these option sellers will be forced to buy back at any price. And not just the sellers of these 6000 call options, as there are a total of over 50,000 call options in existence as I write this article. That's not 30 million ounces held short in COMEX call options, that's 250 million ounces held short in total. And this 250 million ounce silver call option short position is in addition to the futures total open interest of over 400 million ounces. The 250 million ounce Comex silver call option open interest is separate and distinct from, and in addition to the concentrated short position in futures that I complain to the CFTC and COMEX about regularly. While not all of the total option position is naked or not hedged with other contracts, most are. My point is that under certain pricing levels of silver, totally unexpected stresses will appear on the silver derivatives landscape. This is not dissimilar to the recent warnings of Warren Buffett about derivatives in general. If this recent option transaction was a transfer, in effect, of the silver short "Hot Potato", by Barrick or a concentrated short, and we do move into the money on these call options and most silver call options, it will be like dumping rocket fuel on an existing supply and demand fire. Like I said, this was a pretty interesting trade.

Gold hedging brinkmanship is here By: Tim Wood NEW YORK -- Newmont [NEM] has provided unusually fulsome disclosure -- as far as gold producers go -- on a troublesome portion of its hedge book. The revelations are important because they potentially recast the definition of hedging margin calls, as well as provide an unusual view of hedging counter party risk management. Newmont revealed that its hedge counter parties for the Yandal operations have exercised "right-to-break" clauses prior to the scheduled maturities of Yandal's forward sale contracts. This means that the counterparties can demand cash settlement rather than wait to take delivery of promised ounces of gold.(See table at end of story) UPDATE: A well placed source has informed Mineweb that the Yandal counterparties are not JP Morgan and Credit Suisse First Boston. The counterparties demanded early cash settlement in December and January, with the right to do so again in June 2004. The right-to-break amounts to a type of margin call since it creates a distinct liability that is solely determined by the counterparty and is vastly different in character and impact from hypothetical mark-to-market losses conventionally reported. If anything, it looks like a clawback. Yandal is the festering sore on Newmont's overall hedge book, comprising two thirds of its unrealised negative value of $433 million. Alarmingly for American investors, but commonplace for their Australian counterparts, is Yandal's paucity of reserves relative to its hedged commitment -- 2.1 million ounces and 3.4 million ounces respectively. The 1.3 million ounce deficit is equivalent to nearly two years of production and can only be offset by a large exploration discovery or by buying metal in the market. Brinkmanship Newmont is the first company to detail hedging right-to-breaks, but the move could compel other companies to provide similar disclosure where they are similarly affected; at least investors should demand it. The number one gold producer can afford the broader disclosure because it holds an ace up its sleeve -- Yandal is ringfenced from Newmont, just as the operations were when engineered into Great Central Mines and then Normandy. Newmont reinforced the arms length relationship in its 2002 second quarter report to the SEC wherein it clarified its repurchase of Yandal's outstanding senior notes worth $300 million: "Newmont's offer, however, should not be construed as a commitment by Newmont to provide ongoing financial or credit support to Normandy Yandal." Consequently, sources say Newmont is prepared to try brinkmanship with the Yandal counterparties. The right-to-break options bunch up in 2005 and, assuming gold prices at least stay in the $350 per ounce range, would bankrupt Yandal. Newmont is apparently prepared to let that happen rather than defend Yandal with what could be a year's worth of group profits, especially if gold prices rise as many expect and clobber the hedge book even more. If the counterparties go ahead and call for accelerated cash settlement then they'll simply be joining a line of creditors, along with Newmont. In one respect it would help Newmont by vapourising 3 million ounces of unwanted hedge commitments. On the other hand, it would cost 2 million ounces of reserves at a time when the market is desperate for them as well as roil the bullion banking business that is already a victim of declining liquidity. The bullion banks are clearly trapped. If they do not offer Newmont some assurance that they will hold off from cashing in, then the producer has no incentive to invest in exploration; indeed to do anything other than high grade the operations into premature closure. That would leave the bullion banks will a fraction of what they are after. Alternatively, if they back off the cash calls, then they could at least get the ounces back, but have to face down the increasing risk implicit in a rising gold price. Risk The problem is all risk -- what else could have triggered the cash calls. Yandal's impecunious balance sheet and the sharply higher gold price has clearly caused turbulence in the counterparties' own offsetting contracts. So Bullion banks' willingness to stay their cash calls may be a function only of their leverage over players further along the chain. In the case of the Australian banks it seems, from anecdotal evidence, that they are under some pressure to deliver on their portion of producer hedge agreements, while the country's Central Bank is no source of help given its gold reserve sales and past heavy lending. That has some experts convinced Newmont's brinkmanship could have ramifications for bullion banking across the globe. It is another timely reminder of how bullion banks held the upper hand when providing financing for new projects through gold forward sales, protecting themselves in several ways whilst leaving shareholders vulnerable. More so for companies with feeble balance sheets to begin with -- companies investors should not have been encouraging to bring marginal deposits to account anyway. Yandal Yandal was bathed in controversy after being used as the vehicle by which Normandy's Robert Champion de Crespigny and fellow Aussie magnate, Joseph Gutnick, gained control of Adelaide based Great Central Mines at a super price. Normandy and Gutnick's family business were subsequently charged with acting illegally in the takeover, but the matter was overturned on appeal. Great Central subsequently came to be wholly owned by Normandy. Yandal consists of the Bronzewing, Jundee and Wiluna mines which produced a combined 177,000 ounces of gold in the fourth quarter. Comments from Jim Sinclair: This revelation by Newmont is to be commended in terms of corporate transparency.This article and revelation prove my contentions concerning the dangers of hedging for the gold producer. Yes, NEM can let the subsidiary go into bankruptcy but that means that the ownership of the producing entity, now bankrupt, which we shall assume is valuable, will pass into the hands of the lending banks. It may well prove a good deal to get the producing property back for the banks involved. I was informed that someone in NEM's management said that I was an "alarmist" when I called attention to these unusual hedges as being quite dangerous. They should have consulted me prior to acquiring Normandy and no alarm would have then been necessary. I might add a word of further caution. Before high-grading the property in question they should consult their legal counsel concerning the ramifications of denuding an asset that is planned for bankruptcy to avoid a trade debt. I apologize in advance if this point is taken as being "Alarmist." When will the industry recognize that all the money I spent in 1999/2000 on advertising in various trade publications was correct?

In estrema sintesi, mans dargais, Sinclair dice che è un non senso una posizione su derivati margin free, una cosa che non esiste nella realtà. E quindi, i pericoli insiti nelle posizioni hedgiate per Barrick sono reali e molto gravi. Anche se Barrick può differire la consegna dell'oro venduto forward, e vendere la produzione attuale al prezzo spot, questo non risolve il problema, e può addirittura aggravarlo. Ed è inutile sperare che l'oro si sgonfi, e ritorni stabilmente sotto i 330 $, in modo da rendere di nuovo profittevole il prezzo forward, perchè questo non accadrà. Period! Però dice anche che Barrick può benissimo cavarsela, se agisce tempestivamente e si dà da fare a comprare sul mercato per chiudere le posizioni vendute. La cosa non sarà ovviamente indolore, ma in virtù dell'enorme cassa che possiede fattibile. Lui vede molto più negativamente Newmont. In quanto Barrick perlomeno dichiara puntualmente il proprio hedge book, ed è stata già punita dal mercato. Newmont invece ha scelto di non riportare le proprie posizioni derivate, ma il fatto che non le riporti non vuol dire che non le abbia. Quindi, i risultati di Newmont sono pro forma, in quanto i loro hedges non vengono "mark to market". Newmont ha ereditato le posizioni derivate di Franco Nevada, società che ha acquisito. E corre voce che siano posizioni così complicate e contorte che loro stessi non ci stanno capendo un benemerito.

The interpretation of this news and commentary is all over the place and terribly confusing. Can you interpret this for me in words I can understand? ------------------- Mon cher, già il mio inglese non è gran ché; se poi leggo un incipit come quello riportato... Se c'è qualcosa di importante, potresti mica riassumerlo? :-) 2ali

Della serie: state lontani da Barrick, ma non vi avvicinate neppure a Newmont. _________________________________________ What's the story on Barrick's hedge position? Author: Jim Sinclair -------------------------------------------------------------------------------- Q: I am confused. The following (see bold text below) is a copy of a posting that has appeared on many gold investor web sites and chat groups. The interpretation of this news and commentary is all over the place and terribly confusing. Can you interpret this for me in words I can understand? February 13th: Globe & Mail newspaper says Barrick President has no time to monkey around: "The Globe and mail reports in its Feb, 13th, edition that the newly installed Barrick President Gregory Wilkins has one job qualification that counts - he enjoys an uncommonly durable relationship with the chairman and founder, Peter Munk. The globe's Gordon Pitts writes that Maison Placements Canada's John Ing notes that Wilson has often played a trouble-shooting role for Mr. Munk. Mr. Wilkins, 47, is an accountant and financial executive who understands Mr. Munk's constantly morphing collection of resource and real estate assets, has worked with the 75-year old entrepreneur for 22 years. In fact, the relationship goes deeper - he was once Mr. Munk's personal accountant before he started climbing up the ladder in the Barrick organization. Mr. Wilkins has a reputation for being both strong in grasping the big picture and having command of the financial details. Mr. Ing says that Mr. Wilkins must immediately address the state of Barrick's hedge book, as well as confront the operational issues reflected in the troubling fall in the last fiscal quarter." Web Comment from another web site: Note:this is not JSMineSet comment. "Barrick held a conference today. I received a phone call from a very savvy listener to that call. He was astonished. It seems that Barrick does not intend to make any significant changes to their hedging operations. The forward sale reduction plan seems to be still as it was. The commentary from Barrick extolled, in their opinion, their hedging program saying it worked extremely well for them." Jim Sinclair's Commentary: You have asked for my comments concerning the Brimelow report on the ABX conference call. Well, here is the real story, brief and straight. You have to think like a CFO when we get to the money flow comments, so be prepared. 1/ There is no such thing on the planet such as a margin free gold derivative. That concept goes along with selling the Brooklyn Bridge. It's purely spin. 2/ Any one can defer a future sale. ABX's technique of "a deferred spot bullion sale" (which is selling at present cash price but you don't deliver it) is nothing miraculous. In practice, it is deferred in the same manner as rolling forward a Comex contract except it is done by the gold bank in the construction of the special performance agreement. It gains its spin only because the deferral finale date is wide open. Therefore, the deferred spot sale is about as recent a development on earth as the cockroach. 3/ Deferring forever, or rolling forward forever, as short in a rising market will create money demand for the hedger. Today, if the hedger has an open line of credit with the parent of the gold bank, it is called margin free. The primary risk in these plain vanilla type arrangement is the enormous credit lines that might be required. 4/ ABX is a hedger with a short position that can be satisfied by delivery with some cover now in the marketplace - within two years at their present rate of production. 5/ ABX has the largest treasury among the big hedgers. 6/ Between credit lines and treasury cash, ABX can probably survive as long as gold remains under $529 per ounce until the end of 2004. Assuming a high end short position of 17,000,000 oz., ABX would have a loss on the hedge of $17,000,000 per dollar that gold moves. On the one side they have this short position that is costing them money because market is going up. But, on the other side, they claim they aren't loosing anything because all their "in the ground" gold is appreciating in value. Therefore, according to them, they have no loss. But what value does gold have in the ground? How do you get all that out of the ground? You can only get so much out in a year! So there is a real loss in opportunity cost and the cost of credit line activated but they are not calculating that. Assume that ABX has a short at a forward delivery price average of $350. Gold rises to $450 and ABX delivers all newly mined gold into its obligations. That means the each month ABX is delivering, on average, about 666,666 ounces of the 8,000,000 total ounces they can produce in a year into their obligations. Each month their opportunity loss on the sell side of their hedge is reduced in ounces by this amount. Therefore, by making monthly deliveries there is a scale down loss on the sell side of the hedge. In other words, if gold rises $100, the loss ABX would take would not be $100 dollars on all of their gold, the loss would only be on the amount they are delivering (666,666 oz per month) less what is to be delivered. The total loss would not be $100 an ounce, but rather about $60 an ounce (since it is only on gold delivered and not all gold outstanding). And each month, their total would be reduced (after one year, it would be reduced by approximately 8 million). So, as ABX is making monthly deliveries, it is reducing the amount of gold they are short. But remember, the market doesn't rise $100 in one day and then go sideway for the balance of 23 months (or at least it hasn't historically). If gold goes to $450 in two years, then the $100 increase would not apply to the entire holding but rather would affect the amount being reducing suntrea cted from the blance left to delivere each month by delivery/production. So, ABX would deliver into the short as they gold price was rising. The loss, in fact, after delivery, is simply lost opportunity only once the transaction is closed. It would increase cash by the proceeds of the delivery and its effect on earnings would the same as if all gold was sold at the assumed average derivative obligation price of $350. The sale price would then be attributed to each project thereby causing the projects to miss the potential increased gold revenues but releasing money from whatever they call a no margin call money requirement back to the treasury. Therefore two things mitigate the potential for ABX to face financial problems: a. Even though the number appears enormous, ABX's current hedging only equals about two years of production. Remember, when we did our hedging study we found for balance sheet viability one year with a large treasury cash position was not a problem and two years not a critical problem if the company so involved had a extremely large treasury as does ABX. b. ABX can avoid problems by: - Making the decision to cover by, for instance, buying three months of production gold now around the prices ABX are in fact short, assuming it to be $350. - ABX then can begin immediately delivering into their short position all produced gold from today forward as well as the gold bought in the market place. This, in fact, might have happened. We don't have the facts nor are they available but something just happened that took gold's price to $390.80. Yes, there is a war premium out there but that is not what took the price to $390.80 overnight. We certainly know that it was not the public that took gold to this price. This was a totally professional market with no individuals involved whatsoever - this wasn't about gold shares or NY stock exchange, this was a cash bullion market gold bank pro front running some kind of short cover. The only way for ABX to get into trouble is if they simply turned their backs on the gold price believing it to still be in bear market, shut off their risk control program and they turn out to be wrong. Then gold goes much higher and faster than their treasury department expects. That would be an act of shutting down the risk control program. Such a decision by management might be what founded the recent theatrics in the ABX boardroom. I do not know for sure but that is my guess. This is the bottom line, all else is "sound and fury signifying nothing." Because you want an answer tonight, I am working on figures regarding the average sale of the hedge short and production from memory but I feel they are, if not totally accurate, close enough to answer your question. ABX will, in my opinion, not turn their backs on the gold market, shut down their risk control program, assuming the gold price will go down. I say this because nobody in a public company will gamble that way in today's environment of litigation and new corporate responsibility. If ABX was my company, with the decision my responsibility, I would buy three-month production anytime the price of gold was in the general neighborhood of my average short sale. I would deliver all production and my purchase in the market place into my short position. Somehow I don't think I should hold my breath waiting for a call from Mr. Monk for my advice. I would be a dead blue Smurf by the time my phone ran and it would be a wrong number. Hedging makes no sense at this level because it buys the industry little. Gold is going higher or the gold industry is history. In truth, no one has a total cost of production under the low gold established at $248. Total cost includes all corporate costs. No mine operates without the corporate structure and its total expenses. The company with the real, possibly critical problem is the one that has adopted the accounting rules that require it to declare its business purpose to be arbitrage in metals and mining, thereby hiding the hedges, in my opinion, more from themselves than from anyone else that matters in the decision process. If gold is in a major bull market, their somnolence guarantees a deterioration of their balance sheet that could render them incapable of either financing or borrowing their way out of a bad commodity position. It is a strange world we live in where the company (ABX) that is open with its derivative information is the one most punished in the marketplace, and the other that has adopted a legal but more obtuse accounting seems to be free of major market displeasure

Barrick's Hedge Book By Steve Saville Barrick Gold (ABX) is not one of our stock selections nor is it ever likely to be as long as it has a large hedge book, but its latest financial results (released last week) are worth commenting on. ABX produced 5.7M ounces of gold in 2002 and made a profit of US$193M. The company forecast that 2003 production would be 5.4M ounces. However, as is usually the case with this company the most interesting aspect of the latest ABX results was the information that was disclosed about its hedge book. This information is particularly interesting because what Barrick does with its enormous hedge book can effect the entire gold industry. As they have done every quarter for as long as anyone can remember, Barrick's management crowed last week about the fact that their forward sales program had allowed them to sell gold in the latest quarter at a price that was above the average spot price. They also confirmed that during the first several weeks of 2003 they had taken advantage of their ability to defer delivery into forward sales contracts and had, instead, sold 100% of their gold at the spot price. They did this because the spot price was higher than their forward sales price. This might seem like a logical thing to do, but it means that a liability has simply been pushed into the future. Furthermore, regardless of the current spot price it would only make sense for Barrick to defer delivery into forward sales contracts if they were confident that the spot price was going to be lower in the future than it is today. In other words, by their actions Barrick's management is saying that a gold price in the $350-$380 range is an aberration and that the price will fall back to $325 or lower. At the end of 2002 Barrick's hedge book had a mark-to-market value of negative $639M. At the end of 2001 the mark-to-market value was positive $356M, so there was an unrealised loss of $995M in the hedge book during 2002. Deducting the reported earnings of $193M we get a net loss for 2002, including unrealised losses on derivatives, of $802M. So, during one of the best years for the gold price since the 1970s one of the world's largest gold mining companies lost $802M. If the gold price ends 2003 at $450 then Barrick will, at that time, have a hedge book with a mark-to-market value of negative $2.4B (assuming that all of this year's production is sold at the spot price). In this case it would have taken less than 2 years to wipe out all the gains achieved by the forward sales program over the past 15 years. Steve Saville Hong Kong February 18, 2003

Barrick's Silver Bombshell By Theodore Butler (The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.) On February 12, Barrick Gold issued two press releases. (Both can be found at www.barrick.com) One announced the firing of its current CEO, and his replacement, due to poor financial performance, especially its stock performance. The other press release concerned its fourth quarter earnings and details on the hedge book. While there has been ample discussion and numerous articles on the gold hedge book, it appears that a blockbuster announcement on silver in the press release has gone unnoticed. And since Barrick is one of, if not the largest, silver short in the world, their announcement that they intend to deliver against and to buy back and cover their entire silver hedge book (not gold), could have profound impact on the market. About four or five years ago I wrote about Barrick Gold and the influence their forward selling had upon the price of gold and silver. I held them up as the example of manipulation of gold and silver through leasing and short selling. I complained about them to the Securities and Exchange Commission, the Commodity Futures Trading Commission, Barrick's own auditors, and, of course, to Barrick itself. I think I was the first one to raise the issue publicly. I say this not to boast, but only to give full disclosure and perspective in what I have to say about Barrick today. My main gripe was about Barrick's role in hedging. Legitimate hedging did not allow for years of future production to be dumped on the market in physical form, as leasing and forward selling permitted. Further, I complained that selling short years of production forward, regardless of the price, was so stupid as to defy description. Most of my writing about Barrick took place while gold traded under $300, and even under $275. My point was that legitimate hedging doesn't take place at prices approximating the cost of production. Shareholders are not well served by the company eliminating the profit potential from rising gold prices. Had Barrick taken this advice to cover their gold shorts at those price levels, they would have come out as heroes, and their shareholders would have benefited greatly. In addition, had Barrick covered their gold shorts while prices were low, they would have been in position to hedge at much higher prices (over $100 higher) and lock in real profits for their shareholders. Instead, they actually increased their short position and have suffered the consequences. While they obviously made a serious mistake in not closing out their gold shorts while prices were low, Barrick is not run by stupid people. As one of the largest gold miners in the world, they get advice from what are thought to be the best minds in the financial world. They appear to be learning from their mistakes in gold, based upon the unambiguous nature of what they say about their silver hedge intentions. In the Notes to the Financial Statement section of their earnings announcement, in a section entitled, "Spot deferred silver sales contracts and written silver call options", Barrick stated the following, on Feb. 12: "Spot deferred silver sales contracts have the same delivery terms and pricing mechanism as spot deferred gold sales contracts. A group of these contracts totaling 14.3 million ounces of silver are accounted for as normal sales contracts, as it is probable that we will physically deliver silver production into the contracts. For a separate group of contracts totaling 21 million ounces, we intend to financially settle these contracts, and therefore they are accounted for as derivatives under FAS 133." In following Barrick closely for many years, I can tell you they have never made such a statement before. In addition to delivering this year's (maybe entire) silver production against the hedge book, Barrick intends to "financially settle" the rest of the silver short hedge book. That's big news. So big, that had they made the same announcement about gold, it would be all anyone talked about. But they didn't say that about gold, only silver. And I think there is a very good reason for that, namely, that Barrick finally understands the real risk of a big silver short position. Barrick, in addition to being the largest gold, and probably largest silver short in the world, is also the "soul" of physical forward short selling. They were the pioneers and are the leaders and pacesetters of gold and silver hedging. They wrote the book. Everyone else followed their lead. For Barrick to come out and state their intention to cover their silver shorts is both profound and intelligent. It is likely that other silver shorts, including other mining company shorts, will also see the light and follow Barrick. That could have a big impact on the silver market. And it would be in the best interests of the other shorts to follow the leader, precisely because Barrick's move makes good sense. Barrick has good reason to have decided to get out of their silver shorts, the same good reason for an investor to buy silver - the risk/reward ratio. There is not much real room to the downside in silver nor potential hedging profits or protection. Silver prices have gigantic upside potential, $50 or $100 higher, or more. Dimes to the downside, dollars to the upside is not very inviting to a short seller. Barrick's directors and risk control people took a close look at their overall liability, in light of their poor performance, and obviously concluded that silver presented a problem. A 46 million ounce silver short position ( there's almost 11 million additional ounces short via written call options) offers scant protection for Barrick to the downside, maybe $20 million on a decline in silver prices. But, at $25/per ounce, Barrick would be out a billion dollars on their silver hedge. At $50, they'd be out $2 billion, at $100, $4 billion. Smart management does not make bets that offer so little in reward with risk that might break the bank. Barrick has wised up. It's about time. The reason Barrick has decided to close out their silver shorts also might have to do with the cost of doing so. Because silver is so dirt cheap, it would not take relatively large amounts of money. While Barrick is being intentionally cryptic in saying they will "financially settle" a large chunk of their silver short position, even if they paid cash for all 35 million ounces held physically short, that comes to $175 million, something Barrick could afford. With the leading silver short saying, in effect, that they will short no more, the manipulation that has existed for decades is losing a key sponsor. Who will take their place, with $4.50 silver and everything saying buy, don't sell? There is the very real possibility of a domino effect here. Putting aside the deficit and real supply/demand fundamentals, if the other shorts wake up, as Barrick has, and go to cover their shorts and short no more, that alone could drive silver to $100/ounce. Also, I can't help but recall the correspondence, over the past year, with the CFTC and the COMEX, about me questioning the legitimacy of the giant and concentrated silver short position. I said show the me the real silver or legitimate hedging it represented. They couldn't show the silver, because it doesn't exist. Now the largest silver short is clearly saying they don't wish to be hedged anymore. I ask the CFTC and COMEX, with Barrick renouncing silver hedging, who is legitimately hedging silver? I want to congratulate Barrick for coming to their senses by terminating their silver hedges. All Barrick shareholders should be dancing with glee. They will no longer be in harm's way because of a silver price explosion. Many silver investors already know what Barrick now knows. Soon, the whole world will know. Sono poi andato a vedere il suddetto comunicato stampa e in effetti è scritto come ha detto Butler. In più la sua interpretazione della cosa non mi sembra assurda. Allego l'ultimo hedge book preso proprio da quel comunicato.