Morgan, Citigroup offshore deals propped up Enron, report says


Newmont's hedge book bites back;
Yandal worth more dead than alive

By Steve Maich
Financial Post (National Post), Canada
March 4, 2003

After months of wondering what nasty
surprises might be lurking in the hedge books
of the world's major gold miners, the market
is now getting a look at the industry's first
bonafide hedging disaster.

The situation now unfolding at Newmont Mining
Corp.'s Yandal project in Australia is enough
to send a chill through any investor who's
ever wondered what might happen if a heavily
hedged producer lost control of its
derivatives exposure. In the case of Yandal,
Newmont might be forced to walk away from an
otherwise profitable mine that produces about
650,000 ounces of gold each year.

Standard & Poor's cut its credit rating on
Newmont's Yandal operations by three notches
to junk status yesterday, after reviewing the
project's hedging exposure, released by
Newmont last week. The project's credit
rating now sits three levels below investment
grade, and its outlook has been lowered to
"negative" from "stable."

"Without support from Newmont or a material
change in current conditions, it is unlikely
that Newmont Yandal will be able to pay its
2005 settlement exposures," S&P analyst
Thomas Watters said. "With this additional
information, it increases the uncertainty
surrounding parental support [from Newmont]."

Even by the gold industry's relatively
aggressive standards, Yandal's derivatives
exposure is stunning. The unit has 3.4
million ounces of gold committed through
hedging contracts that had a market value of
negative US$288 million at the end of 2002.

That would be a problem for any major
producer, but the situation is particularly
dire for Yandal because the development's
total proven and provable gold reserves are
just 2.1 million ounces. In other words, the
project has, through its hedging contracts,
committed to sell 60% more gold than it
actually has in the ground.

Making matters worse, the mine's
counterparties can require Yandal to settle
the contracts in cash, before they come due.
In all, about 2.8 million ounces are subject
to these cash termination agreements by 2005,
which could cost the company US$223.7 million
at current market prices.

With insufficient gold to meet its
obligations, and just US$58-million in cash
to make up the difference, bankruptcy may be
the only option available to Yandal, analysts

Comparing Yandal's reserves to its hedging
liabilities "suggests that the Yandal assets
may be worth more dead than alive," CIBC
World Markets analyst Barry Cooper said in a
report to clients.

All this is raising even bigger questions
about the impact that the Yandal situation
might have on the industry's other major
hedgers. Companies such as Canada's Barrick
Gold Corp. and Placer Dome Ltd. have lagged
the sector's strong rally of the past year,
largely because many investors and analysts
distrust the companies' derivative

A high profile blow-up for Newmont, the
world's biggest producer, could "send bigger
shock waves" into other hedged companies, as
investors try to avoid the uncertainty
surrounding derivatives, CIBC's Mr. Cooper

For investors such as Eric Sprott, head of
Sprott Asset Management, the situation at
Yandal underscores the threat that hedging
poses to many of the largest players in the

Mr. Sprott, a big fan of gold stocks in
general, has been an outspoken critic of the
extensive hedging programs employed by the
likes of Barrick and Placer Dome. Most such
hedging programs are closely guarded secrets
within each company, meaning investors often
can't gauge the risk of holding the stock
until it's too late, he cautions.

"This isn't good because it suggests that
producers have been taking on risks that they
shouldn't have," Mr. Sprott said. "I know all
the producers will say their hedge book is
different, but as investors we never really
know what's in the hedge book."

The good news for Newmont shareholders is
that the hedging contracts are not the
responsibility of the parent company. Newmont
can choose to walk away from Yandal rather
than cover the losses and appears
increasingly likely to do just that, analysts

Newmont was never a heavy gold hedger, but it
inherited large derivatives exposure through
its acquisition of Normandy Mining Ltd. last

Newmont has said it plans to slash its hedge
book, and cutting Yandal loose may be just
the way to do it. Abandoning the three
Australian mines that make up Yandal would
cut the size of Newmont's hedge book by more
than half, Mr. Cooper said.

For now, the management at Yandal can only
hope the price of gold crashes, or the
Australian dollar surges against the U.S.
greenback. Failing that, they can hope that
their counterparties agree to restructure
their hedging contracts rather than force the
company into bankruptcy. But at the moment,
none of that seems particularly likely.


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