RE: Barrick Gold May Receive Bid From Rival Newmo Jim Sinclair's view of this:
Sunday, March 28, 2004, 8:32:00 PM EST
Newmont To Make Takeover Bid For Barrick?
Author: Jim Sinclair/Bloomberg
Barrick Gold May Receive Bid From Rival Newmont, Telegraph Says
March 28 (Bloomberg) -- Barrick Gold Corp., the world’s third- biggest gold producer, may receive a takeover offer from larger rival Newmont Mining Corp., the Sunday Telegraph reported, without saying where it got the information.
A five-year agreement barring a transaction is coming to an end, the paper said. The combination would create the largest gold mining company with reserves of 177 million ounces, the paper said. It also may lead to pretax cost savings of $300 million, the paper said citing analysts at National Bank Financial of Canada.
Barrick Chief Executive Greg Wilkins told the paper he is not interested in using the company's stock in a transaction and would ``strongly oppose'' a hostile bid.
Barrick, based in Toronto, is valued at C$16 billion ($12 billion) and Newmont at C$20.5 billion.
https://quote.bloomberg.com/apps/news?pid=10000082&sid=aHGoYHa5lwLE&refer=canada
Jim Sinclair's Commentary:
If this story is factual and Newmont's bid is accepted by Barrick, in my opinion we have seen a major victim of gold derivatives. Barrick presently has a $1,700,000,000 loss on its gold derivatives which are designed as margin free as it pertains to the gold price alone.
However, a closer examination of public documents reveals in a footnote that the counterparties on the gold derivatives can call for funds not based on the gold price by itself but rather based primarily on the liquid position of Barrick's balance sheet plus the gold price.
We in the mineral exploration business have seen Barrick exercising a much stricter control over its operating costs in the past year. In Tanzania alone, IMO, Barrick helped inflate exploration costs by the salaries and rents they paid and by their liberal approach to management. But all this changed significantly in the past 12 months.
Barrick has returned to traditional management and industry scale cost allowances. They have moved many of their people from Dar es Salaam into the field at the Bulyanhulu mine. So it is obvious that Barrick's top management has a keen eye on the company's balance sheet condition as the price of gold increases their derivative losses.
New accounting rules now require that all derivatives are marked to the properties on whose behalf they have been entered into. These OTC derivatives have in general been part of the financing programs for new production and are embedded into the financing loan agreements. They are not as easy to cover as one might think without paying off the entire development loan.
No one outside of management and their advisors know if this is the case for Barrick as the disclosure laws concerning derivatives leaves them non-transparent in terms of providing details of the special performance which all OTC derivatives require.
What the new laws do require, however, is if you declare that as a gold producer you are a professional derivative dealer, you can avoid the mark to market requirements and charges to the economics of each project the derivative is identified as being attachment to.
If you do not declare yourself to be a professional derivative dealer as well as a gold producer, then you have to mark to market and charge each project with the derivative loss.
About 18 months ago most of Barrick's projects took economic nosedives and this may have been because of the derivative issue.
I am sure after the Normandy (Beach?) purchase by NEM, which almost caused a financial problem for NEM, managment there is prepared to face the Barrick derivative positions. I would warn NEM that the gold banks NEM will be dealing with have also come up the learning curve. Therefore, this time if they are threatened with receiving back the property if the company steps away from the debt, they might well take it back.
I wish all those involved in this potential deal the best of luck. I would suggest that no stockholder stands in the way of any potential deal that NEM and ABX agree to.
Not one company in the gold industry has said a word to me concerning the hundreds of thousands of dollars I personally spent advertising in 1999 and 2000 in major mineral trade publications such as The Mining Journal and Mining Monthly, literally begging them to stop the madness of hedging gold and derivative financing of then non-economic projects.Now, IMO, they are paying up for this. I told them that they were setting in cement bankrupcy for the industry if they did not stop.
Some years ago, I visited with Barrick's Randall Oliphant, then Barrick's president, and his legal counsel. I was asked what my opinion was on their hedging. I answered at $305 Barrick had a problem and at $354.50 "you Mr. Oliphant have a problem."
I find this news of a potential deal good for the stockholder but am saddened because I feel I know why it is happening.