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@jpose. I just don't follow or understand any of your thinking or numbers on protection of debt repayments. You say in an Armageddon situation - like what scenario? Gold is a low vol product, downside moves in gold happen over long period of time, upside can happen quickly. Admin coats run close to $10m at HUM, and Dan hedged only 60k Oz. Your analysis of protection of debt payments is flawed, your numbers don't add up Read the RNS.
Oh, and GP up big today and.....HUM SP down. Go figure.
DIM
Spelling the debt payment protection out more clearly.
We have been told that debt to be repaid in this year is $30 million ie that is a cash requirement in this next 12 months, as the company is de-leveraging at a phenomenally quick rate (and will leave the company as a cash cow).
Above $1350 per oz. is being regarded as "super profit" great to have, but not essential for debt repayments.
If gold drops below $1350, management want to protect the whole margin between the AISC of $850 ish and $1350, an amount of $500 per oz. and on 60,000 oz. that calculates as $30 million.
It is a specific hedge for the debt and will not be expensive, as it is unlikely to come into play: just like life insurance or mortgage protection insurance: you hope that you will not need it, but wise to have, until you have decent savings.
The administration costs are irrelevant, as they should be covered by the profits on the unhedged portion of production and in any event, some items are not cash (eg. share bonuses, ) and some will be discretionary spending.
Personally, I don't see the hedge coming into play, but had it not been taken out, a basic step in risk management, I would not increase my holding here. As it is, I see this as the next SLP, held down by unwarranted fears of a short LOM and failing to take on board the proximal opportunities to convert existing resources and underground exploration.
I am hoping for 120,000 oz (given the second ball mill), AISC of $850/$950 for 2020 and a clear road map for the upgrade of resources and exploration. The latter should provide the periodic RNS excitement to an otherwise solid year of production/pay down of debt.
Daily Gold Market Report
Gold resumes virus-related climb to start week, sentiment on favorable track overall
(USAGOLD – 1/27/2020) – Gold resumed its climb this morning to start the week as stock markets in Asia and Europe dropped sharply (from 2% to 3%) in response to the spreading coronavirus. The metal is up $12 in early trading at $1584. Silver is up 15¢ at $18.25. The Dow Jones Industrial Average is down 440 in the overnight mark as this report is posted. Reuters reports this morning that the virus has “subdued” demand for gold inside China itself, but one wonders how long that will last.
Beyond the virus-related impetus to pricing over the past several days, the notion lingers that gold market sentiment is on a favorable track overall. John Kaiser of Kaiser Research says “there are signs that the market is starting to take the move in gold seriously” – the early stages of a repricing he believes could push the metal to the $2000-$3000 range. “[T]here’s something different going on,” he said in an interview at the Vancouver Resource Investment Conference. I think we are in a period of increased, rising uncertainty similar to the (19)70s about what is America’s ongoing role in the world.”
@Jpose
I dont think you understand how these options will likely work, or the purpose and reasons for hedging in commodity corporates. This is not about insuring tail risks, i.e. what you described. If it were, then the product being bought would be very different to that described in the RNS. These PUTS will very likely be monthly average options to roll off every month, i.e. 10k per month to match 50% of production. So we are likely already down to 50k oz left of a hedge or have fixed 1/6th of the average pricing period. If you were to "insure" downside risks you would hedge a larger volume of oz at a lower strike, say 120k oz at $1,200 and would roll the options each and every month.
Its inescapable that the hedge program put in place by Dan B is chicken feed in the form of protection against declines in revenue vs GP. If you are going to hedge you need to move the needle, otherwise dont bother to hedge. To any grade A mining exec I can assure you this is NOT a strategy.
With all due respect, I think folks are over complicating the put option business, which is very clearly explained in the RNS. 60,000 ounces is roughly the entire production for H1. They have bought put options which give them the option (but no obligation) to sell those ounces at the strike price of £1350. Clearly the options will not be exercised unless the gold price falls below £1350 but, if it does, then they know that they can at least get the £1350 for the ounces sold under the options, thus ensuring that they can meet debt repayments. In effect, as the RNS states, they have put a floor under the gold price. It may well be that the number of ounces covered by the options reduces by a sixth each month but, if so, it matters not. If the price only falls below £1350 in the 6th month of the half year, and by that stage the cover provided by the options has reduced to only 10,000 ounces, fine, because that's all they have left to produce in that half year, having sold the other 50,000 at market rates above the strike price. It works the same way if they are only covered for 10,000 ounces in any of the six months, as they will only have 10,000 ounces to sell in any month. The precise mechanics don't matter but I am confident that the effect is as described. Any other interpretation is simply inconsistent with the plain words of the RNS in my opinion.
Exactly so, Ctw.
The debate does focus the mind on the potential here.
What we are all saying is that H1 at $1350 has the potential to pay the whole year's fixed debt and H2 ( plus any upside on the $1350 throughout the whole year and net of admin./Capex) will be pilling up on the balance sheet.
It is extraordinary that this remains at such a lowly market cap.
Excellent posts today, most enlightening.