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GATA Chairman Murphy and consultant James Turk will speak at Toronto conference
3:38p ET Monday, August 30, 2004
Dear Friend of GATA and Gold:
Dow Jones Newswires reports today in the story
appended here that J.P. Morgan, Goldman Sachs,
and Citigroup are among the big creditors in
the collapse of Australia's second-largest gold
mining company, Sons of Gwalia, a leader in
the practice of hedging gold mine production.
That's what hedging gets you in the future
of gold.
But perhaps more interesting here is the
insightful commentary posted today at the
USAGold.com Forum by Michael Kosares, proprietor
of Centennial Precious Metals in Denver and of
USAGold. That Gwalia's creditors could not agree
on reorganization terms for the company, Kosares
writes, hints that the cruel and frantic search
for real metal is on.
Kosares' commentary precedes the Dow Jones
report below.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Someone, Somewhere Wants That Gold Back Now
By Michael Kosares
Centennial Precious Metals, Denver
www.USAGold.com
Monday, August 30, 2004
When the Sons of Gwalia story was posted last
night I was struck that the creditors were
unwilling to accept the workout Gwalia offered.
That shows there were not many options available.
It also shows the extreme pressure on bullion
banks to get gold repaid from their borrowers
and nothing else.
There's good reason for that as anyone who has
followed the analysis here over the years will attest.
Even settlement in paper might translate to acquisitions
of the physical metal if possible in cross-transactions
designed to replace central bank paper inventory with
the real thing.
This morning's Financial Times points out that petro
nations are not recycling dollars back to U.S. Treasuries
as they did in the 1970s. They are going to the euro.
One step away is to have central bank gold lenders in
the so-called Third World demand the metal itself
over another piece of paper representative of same.
Argentina's gold procurement represents a faint ping
that could become louder as we go forward. The rest
of the world doesn't have the same view of gold that
the Anglo-American nations do.
Also, the action in this morning's gold market seems
to verify that analysis. Someone, somewhere is out
that gold, and the bullion bank as the guarantor is
responsible for paying it back.
With the Australian central bank virtually devoid of
gold, due to its misguided gold policies over the years,
there is no way to bail out Gwalia (and by proxy the
bullion banks that have signed on the dotted line).
One or more of the bullion banks in the group, it
seems, moved to force repayment (probably in gold)
and Gwalia took bankruptcy.
This whole affair could end up being prototypical
and a warning of what's to come as more and more
overhedged mining companies find their backs to
the wall. Look out for the same from South Africa
and Canada -- with goldless Canada being the most
likely suspect to lose a mining company or two to
bankruptcy, and possibly soon.
This situation could become a rolling crisis for the
bullion banks and the mining companies. I do not
believe that this will become a systemic crisis
involving the banks as a whole. But the real result
necessary to settle the problem, if this analysis were
to hold up, would be much higher gold prices.
* * *
Sons of Gwalia Brought Down
by the Hedging it Pioneered
By Stephen Bell
Dow Jones Newswires
Monday, August 30, 2004
http://sg.biz.yahoo.com/040830/15/3msd3.html
PERTH, Australia -- Sons of Gwalia Ltd., Australia's
second-biggest gold producer, has fallen into
administration over a A$348 million hedge book
liability.
The Perth-based company said Monday that it
appointed voluntary administrators over the
weekend after identifying a "serious deterioration"
in the status of its gold reserves.
In Australia, going into administration gives an
insolvent or near-insolvent company breathing
space to deal with its financial difficulties. The
administrator investigates the company's affairs
and gives creditors information to decide whether
the company should be allowed to keep trading
or wind up.
Sons of Gwalia's gold counterparties -- nine
banks and financial institutions -- refused to accept
a standstill agreement on the hedging debt.
Hedging, which is a form of risk management used
by companies to reduce the chance of a loss from
price movements, includes tools such as forward
selling and options.
Citigroup Inc. is understood to be the company's
biggest hedging counterparty, with an exposure
of between A$100 million and A$150 million.
Other counterparties include: BankWest, a unit
of HBOS Plc; Goldman Sachs Group Inc.; JP
Morgan; Dresdner Bank AG; Commonwealth
Bank of Australia; Australia & New Zealand
Banking Group Ltd.; and HSBC Holdings Plc.
As of June 30, Sons of Gwalia's 3.1 million-ounce
gold hedge book had a negative mark-to-market
value of A$348 million. It also had currency
hedges that were A$75 million in the red.
Sons of Gwalia also owes US$170 million to U.S.
pension funds, following a private note placement
in 2000 arranged by JP Morgan.
The administration move has caught out some big
North American companies, including long-term
shareholders Teck Cominco of Canada and
U.S.-based Cabot Corp. California-based Franklin
Resources Inc. has been a major buyer of Sons of
Gwalia shares in recent months, boosting its holding
to 20.7 million shares or 11 percent of the company.
Analysts estimate that Franklin has invested more
than A$50 million in Sons of Gwalia since it started
buying shares in early 2003.
The administration move surprised analysts, who
expected the company to alleviate its financial
problems via a strategic review that was due to
finish this week.
Some analysts had expected the company to book
a A$350 million writedown of its gold assets, and
potentially close its Tarmoola gold mine north of
Kalgoorlie.
But a loss of gold reserves uncovered during the
review caused a breach of hedging covenants,
making it uncertain whether Sons of Gwalia
could meet its commitments.
The administrators -- three partners at Ferrier
Hodgson -- will work with directors to develop a
plan focused on selling the gold business and
recapitalizing the tantalum business, the
company said in a statement.
As well as being Australia's second-biggest gold
producer behind Newcrest Mining Ltd., Sons of
Gwalia is also the world's single biggest producer
of tantalum, a metal used in cell phones.
Sons of Gwalia Chief Executive John Leevers said
that several local and offshore parties had
expressed an interest in buying the gold
division in recent months.
"We're aware that there are people interested, but
there have been no discussions yet," he told Dow
Jones Newswires in an interview.
Leevers said that the out-of-the-money hedge book
will make the proposed gold division disposal
more difficult.
"The sale was never going to be easy as the hedge
book is a significant liability," he said.
Leevers said that it is "very much business as usual"
as directors and the administrator work on the
restructuring proposals.
A former Pioneer International Group executive,
Leevers took over management early this year from
founding directors Peter and Chris Lalor, who have
since left the company.
Creditors will decide the company's future at
meetings to be held within a month.
Some analysts are skeptical of the group's plan to
trade out of its difficulties by retaining tantalum
and selling the gold mines.
"It is difficult to see a buyer for the gold business
with the current hedge book in place," said Hayden
Bairstow, an analyst at Patersons Securities.
"There is more inherent value in the tantalum
business, and in our view it would make an easier
trade sale," Bairstow said.
Patersons doesn't attribute any value to Sons of
Gwalia's Tarmoola and Gwalia Deeps gold assets,
leaving a valuation of around A$120 million for
the remaining gold mines.
Founded in the early 1980s, Sons of Gwalia became
a pioneer in the use of hedging to protect its gold
revenue.
A merger in the late 1990s added tantalum to the
company's mix.
This saw Sons of Gwalia become a market darling
during the technology boom of 2000-01 when its
shares peaked at nearly A$10 each. Its shares last
traded Friday at A$1.30, compared with their
12-month high of A$3.99.
Demand for tantalum plummeted after the dot-com
crash, just as the company tried to absorb its
PacMin Mining gold acquisition of 2001.
Some of the PacMin assets, including Tarmoola
mine, proved disappointing.
Operating costs rose, but the company was
pressured by the need to maintain production to
meet its hedging commitments.
Problems surfaced in 2002 when Sons of Gwalia
started cutting profits and dividends. The problems
worsened this year, with the gold and tantalum
miner's shares halving in value since July 14 when
it unveiled a profit downgrade.
Sons of Gwalia sold around 2.1 million pounds of
tantalum in fiscal 2004. The company produced
521,000 ounces of gold from its Western Australian
mines in the same period.
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WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
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Blanchard & Co. Inc.
909 Poydras St., Suite 1900
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888-413-4653
http://www.blanchardonline.com/
Centennial Precious Metals
3033 East 1st Ave., Suite 403
Denver, Colorado 80206
www.USAGold.com
Michael Kosares, Proprietor
US (800) 869-5115
Canada 1-800-294-9462
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cpm@usagold.com
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