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Posts Tagged ‘silver’

Gold and copper prices push Barrick to record

February 18, 2011 1 comment

“Surging gold and copper prices propelled Barrick Gold to record earnings of almost $900m in the fourth quarter, but the world’s biggest gold producer warned of escalating cost pressures. The Toronto-based company reported lower operating costs last year but Aaron Regent, chief executive, said that inflationary pressures “have become more pronounced” across a broad front, including raw materials, freight and labour. Mr Regent added that demand for these inputs is accelerating as mining projects around the world are brought forward to take advantage of buoyant commodity markets.

In a partial reversal of its aversion to hedging, Barrick said that it had taken advantage of high spot silver prices and attractive option terms to guarantee prices on 15m ounces of silver, which is equal to 10 per cent of Pascua Lama’s output in the five years from 2013 and 2017. The strategy will ensure prices of $20-$55 an ounce.”

Source: Financial Times, February 17 2011

Observations:

  • Barrick took a $4.2bln hit in 2009 to eliminate the hedge book. Net cash inflow in 2010 was $4.8bln, leaving the company with $4bln in cash, of which just over half is planned to be spent on capital expenditure this year.
  • Total cash cost for the production of last year was $457/oz., with Q4 almost $30/oz. higher. Costs are down compared to last year (with low production), but up 32% from 2007 levels.

Implications:

  • The return to hedging gives a signal that Barrick expects the silver price not to rise further. In the ’80s and ’90s Barrick used an extensive gold price hedging strategy, in which the full production of the next 3 years was continuously hedged. With the falling gold prices in this period this was a profitable strategy. In 2003 the company decided to stop hedging to gain exposure to increasing gold prices. However, the open hedges for many years were very costly as gold price never returned to 2003 levels.
  • The cost increase experience by Barrick is in line with increasing cost figures diversified miners announced this week. Controlling operational costs will return to the priority lists in order to protect margins when commodity prices decrease.

©2011 | Wilfred Visser | thebusinessofmining.com

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Gold hits fresh record on inflation fears

May 14, 2010 Comments off

“… in the commodities market, gold and silver prices soared on strong investors demand.
The rally has been supported by a rush of demand for coins and small bars from European investors, particularly in Germany, where there are fears of inflaion in the wake of the €750bn eurozone bail-out agreed on Sunday night.
Spot gold hit a fresh all-time high of $1,224.70 a troy ounce, up 1 per cent on the day. Silver jumped 1.8 per cent to $19.61 an ounce, its highest since March 2008.”

Source: Financial Times, May 13 2010

Observations:

  • Some Southern-European countries are on the verge of defaulting on government loans. As the promised bail-out packages might lead to printing more money and higher inflation, investors are temporaliy moving their money into gold.
  • The strong inverse relationship between trust in European economy and gold price is demonstrated by the fall of gold price directly after the announcement of the bail-out.

Implications:

  • Western countries (not only in Europe) are structurally spending more than they receive, increasing the government debt. The bail-out of banks and the stimulus packages have accelerated this issue. This structural overspending will eventually lead to countries defaulting on their loans.
  • As some Southern-European countries are currently in clear troubles repaying their debt, investors are moving their money from government loans into safer places, like gold. This increases short term demand for gold and lifts prices.
  • Although the demand for gold will decrease again once countries regain the investor’s trust, the overspending problem will be recurring in the next decade. Gold will stay an interesting short term alternative, leading to a higher base level of the gold price and more price peaks like we are experiencing now.