Goldhedge
08-08-2007, 06:42 PM
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD vAlign=top>Dear Jim,
Royal Gold has exploded to the upside. With the HUI still consolidating, the industry may be recognizing the value of the royalty model.
Frank
</TD></TR></TBODY></TABLE><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle>http://www.jsmineset.com/cwsimages/inventory/55643_August0808RGLDChart.gif (http://www.jsmineset.com/#dispimg.asp?imgsrc=http%3A%2F%2Fwww%2Esortweb%2Ec om%2Fcwsimages%2Finventory%2F55643%5FAugust0808RGL DChart%2Egif) </TD></TR></TBODY></TABLE><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD vAlign=top>
Dear Frank,
You would be amazed how oblivious the gold crowd is with regards to the impact of derivative losses on the percentage junior with a major who has negotiated the development loan with an embedded derivative to produce a non recourse instrument. Neither the investment bankers nor the company’s management have a clue.
Yet questions are rising in light of the $2,000 million lost by NEM on derivatives in one quarter. That is a lot of bottom line net earnings to make up. Forget the investment bank thing. That is simply an accounting selection that results in the need for, or not, of mark to model (cartoon) requirements. By declaring yourself a derivative dealer (investment bank for lack of a better definition) and not a mining entity, you can avoid marking to model. That is not good as mark to anything is better than not to mark at all. Mark means to value booking a loss or gain.
The question in people’s minds is how does NEM account for this humongous loss? Do they charge it to the Chairman's expense account? Certainly not. Under US, Canadian and International GAAP is has to be charged to each project for which the derivative was taken. That then increases the expenses which means the 30% junior owns 30% of the derivative loss on that project which is charged to the junior in terms of increased costs to the project that adds to the cost of the extraction of gold. There is a possibility that even on a good project, the junior at the end of the day may well have a pink slip from the major that says "You now only owe…"
The major may well decide not to be philanthropic, which because of the subordination of the junior’s property to the development loan on a closed derivative, they have the right to ask for the funds or dilute the junior to 10% of net profits, which mean ZERO.
The derivative loss migrates to the junior because all juniors have the development loan arranged with derivatives embedded by their majors which is the means by which the loss or gain on the derivatives migrate to the junior's responsibility. How many juniors have even read the indenture of the development loan agreement arranged by their major? Maybe many never even asked. The junior has subordinated their property to the loan in which the short of gold derivative is embedded. Subordination of the junior’s percentage of the property is the means that gives the junior responsibility of that loan or 30% of the derivative loss (if they are 30% JV partners), like it or not, deny it or not, be ignorant or not, be in denial or not.
The derivative does not even have to be closed. Accounting for public companies is on accrual basis so the mark to model will also be charged to the specific project for which the derivative was taken while still open.
This is fact. This is true. There is no question about it, and whoever argues it is not correct and wallowing in self serving ignorance or denial.
I believe smart people are growing to understand that the business model of RGLD, assuming they have staid the course, (I do not know) is the only of three ways to avoid this problem. Only the royalty route, financing with equity, or having a source of huge money that requires no loan for development will survive.
I am sorry to say, but I can see many of the gold shares in a bear market while gold rockets higher because of those DAMN derivatives I have fought since 1999.
Regards,
Jim
</TD></TR></TBODY></TABLE>
http://www.jsmineset.com/
Royal Gold has exploded to the upside. With the HUI still consolidating, the industry may be recognizing the value of the royalty model.
Frank
</TD></TR></TBODY></TABLE><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=middle>http://www.jsmineset.com/cwsimages/inventory/55643_August0808RGLDChart.gif (http://www.jsmineset.com/#dispimg.asp?imgsrc=http%3A%2F%2Fwww%2Esortweb%2Ec om%2Fcwsimages%2Finventory%2F55643%5FAugust0808RGL DChart%2Egif) </TD></TR></TBODY></TABLE><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD vAlign=top>
Dear Frank,
You would be amazed how oblivious the gold crowd is with regards to the impact of derivative losses on the percentage junior with a major who has negotiated the development loan with an embedded derivative to produce a non recourse instrument. Neither the investment bankers nor the company’s management have a clue.
Yet questions are rising in light of the $2,000 million lost by NEM on derivatives in one quarter. That is a lot of bottom line net earnings to make up. Forget the investment bank thing. That is simply an accounting selection that results in the need for, or not, of mark to model (cartoon) requirements. By declaring yourself a derivative dealer (investment bank for lack of a better definition) and not a mining entity, you can avoid marking to model. That is not good as mark to anything is better than not to mark at all. Mark means to value booking a loss or gain.
The question in people’s minds is how does NEM account for this humongous loss? Do they charge it to the Chairman's expense account? Certainly not. Under US, Canadian and International GAAP is has to be charged to each project for which the derivative was taken. That then increases the expenses which means the 30% junior owns 30% of the derivative loss on that project which is charged to the junior in terms of increased costs to the project that adds to the cost of the extraction of gold. There is a possibility that even on a good project, the junior at the end of the day may well have a pink slip from the major that says "You now only owe…"
The major may well decide not to be philanthropic, which because of the subordination of the junior’s property to the development loan on a closed derivative, they have the right to ask for the funds or dilute the junior to 10% of net profits, which mean ZERO.
The derivative loss migrates to the junior because all juniors have the development loan arranged with derivatives embedded by their majors which is the means by which the loss or gain on the derivatives migrate to the junior's responsibility. How many juniors have even read the indenture of the development loan agreement arranged by their major? Maybe many never even asked. The junior has subordinated their property to the loan in which the short of gold derivative is embedded. Subordination of the junior’s percentage of the property is the means that gives the junior responsibility of that loan or 30% of the derivative loss (if they are 30% JV partners), like it or not, deny it or not, be ignorant or not, be in denial or not.
The derivative does not even have to be closed. Accounting for public companies is on accrual basis so the mark to model will also be charged to the specific project for which the derivative was taken while still open.
This is fact. This is true. There is no question about it, and whoever argues it is not correct and wallowing in self serving ignorance or denial.
I believe smart people are growing to understand that the business model of RGLD, assuming they have staid the course, (I do not know) is the only of three ways to avoid this problem. Only the royalty route, financing with equity, or having a source of huge money that requires no loan for development will survive.
I am sorry to say, but I can see many of the gold shares in a bear market while gold rockets higher because of those DAMN derivatives I have fought since 1999.
Regards,
Jim
</TD></TR></TBODY></TABLE>
http://www.jsmineset.com/