RE:T Minus 79 daysIt's nice when a stock goes up. It's nice to see people predicting higher prices. However I am beginning to think that some of you are more cheerleaders than dispassionate observers. For example, nobody has adequately explained what the $30 million derivative loss actually was. I fear that I am revealing my ignorance here....
I think that using derivatives is an excellent way to transfer profit from the smelter to the mine operation, and since the mine operation books are private, we don't ever see them. Mines have much larger ammorts and deprecs, so can absorb higher cash flow before having to report profits. It is not at all a stretch to imagine Glencore to be doing something like this, so someone please explain exactly what is the derivative loss that was reported.
The derivative loss is either a cash or a paper loss. If Noranda actually spent that money, or had to pay it out, that would be proof of their use of this method of profit transfer. Could they have hidden this payment in their books? I think so, given that there are hundreds of millions of dollars' worth of product flowing through the smelter. It could be added in the order of a few cents per pound of zinc, for example.
If it is a paper loss, then I don't understand how it can be guaranteed to be reversed later, which was posted here as the outcome. A paper loss means they are marking a derivative to the market for that product, without realizing that loss. That carries no guarantee that the market will return to profit for the product - in fact it could get worse.
So what product is it? What product gives you a loss part-way through its life, then returns to profit? Are they, for example, hedging on the price of zinc, so that the smelter is stuck selling zinc at $1 per pound instead of market price of say $1.30? The derivative guarantees the $1 part and the difference is the loss the smelter reports? That would make sense, since it locks in a price for the smelter, just less than it could have got, and there is no cash outlay. In fact the smelter should get paid for a bet like that. Now if you did that bet, and you were Glencore, wouldn't you hedge that bet by having the mine do a similar but opposite bet? I suppose in this case Glencore doesn't need to hedge because the higher zinc price goes to their bottom line. Another bet you can do is based on the price of ore, and for sure the mine ops would be involved in a bet like that. Or not - what if the derivative costs the smelter money if zinc prices go up, but Glencore overall does better because the mines make more than the derivative cost. And if zinc goes down, the derivative helps the smelter but the low TC's help the mines. You could also do a bet based on global market TC's, so that the smelter would not profit if they went up, but the mines would, and vice versa if TC's went down.
The point I am making is that I don't believe that Glencore would allow any kind of one-way derivative bet to be made in isolation. It must be hedged by something else. Nobody out there seems concerned that Glencore could be playing loose with the smelter's operations by using derivatives, and if it were true, it will shoot holes in all your rosy predictions for $10share (!!!) and $1 annual distributions. I hope you are proven right and me wrong, but that would make Glencore an awfully generous company, something they are not known for. And let's not forget that the size of the derivative is very small compared to the amount of money flowing through the smelter, but very large compared to the amount of profit that we see. Our profit is 75% lost to Glencore, so I don't know why they would want to pay it if they don't have to. Finally, I still can't see why Glencore would buy us out - that would cost them more money still.