RE: $3.54 Cu/$924 Au/$17.50 Ag - zinc/hedgesThe hedges reduce cash flow by about ~$2.25MM for Au/~$3MM for Cu and ~$2MM for Ag at current prices = ~$7.25MM year. Considering they will generate close to $100MM operational cash flow at current prices, that's not much of a hit when the alternative to debt financing was significantly more dilution. Most people "forget" that fact.
The long call options look very good, particularly for Gold. GMI takes a $150 oz hit btw $650-$800, but captures all the upside beyond $800 oz.
What isn't considered anywhere is the zinc. When they ran the original FS, zinc prices were far lower and complicated the metalurgy, so the just ignored the zinc altogther. At current prices, the ~150MM lbs zinc are well worth recovering.
All they need is to finalize the recovery circuit flow sheet and spend a few hundred thousand to build the zinc circuit. If I recall correctly, the oxides were problematic and needed more test work, but the sulfides were relatively easy to recover. The zinc revenue will flow directly to the bottom line. That's ~10-15MM lbs year (depending on recovery factors) at virtually no cost, throwing off $10-$15+MM a year in cash flow. The zinc cash flow should more than makes up for the hedges.
From the Q3 financials:
"During the second quarter ended June 30, 2007 the company entered into a combination of forward and call option contracts for gold and silver, for quantities based on 90% of the estimated production of these metals from the Cerro de Maimón Project during the initial 3 years, to economically hedge against the risk of declining commodity prices. The hedging program in place provides a forward price for gold of US$650 per ounce for a total of 57,900 ounces and a forward price for silver of US$11.50 per ounce for a total of 1,440,000 ounces. The program includes long call options at an average strike price of US$800 per ounce for gold and US$17.25 per ounce for silver, thus permitting the company to participate in price increases in the event that gold or silver prices exceed the strike prices of the options.
During the third quarter ended September 30, 2007 the company entered into a combination of forward and call option contracts for copper at approximately 10% of the estimated production of the Cerro de Maimón Project during the initial 3 years of operations. The hedging program in place provides a forward price for copper of US$2.52 per pound for a total of 9,497,503 pounds. The program includes long call options at an average strike price of US$4.04 per pound of copper, thus permitting the Company to participate in price increases in the event that copper prices exceed the strike prices of the options.
The above hedging programs were mandatory as part of the requirements of the project debt financing facility with NEDBANK obtained by the company as noted in note 3 above. No further hedging is required. The program requires no cash margins, collateral or other security from the Company.