Rash Of Senior Executives Retiring Or Quitting Tied To OTC Derivatives
Author: Jim Sinclair
I received a concerned email regarding why there seems to be a rash of senior executives retiring or quitting from the top to the middle tier in the gold group. The question can be answered in nine words: short of gold over the counter derivative hedge positions.
Some time ago, I was speaking with the CEO of a small gold producer. He announced to his stockholders with great pride that the development loan negotiated by the major for his company's project was a non-recourse loan. I took him through the transaction to show him that his company actually had a derivative risk that could in a bull market for gold kill the economics of his project or dilute him to a 10% net profits interest which in reality means zero. He offered his resignation to his Board about two months later. The new management hasn't a clue what they face.
Therefore, there is a chance that many mid-tier and higher tier gold shares may under perform or fail to perform at all in a major generational bull market in gold.
In early 2000 I ran a cartoon in the Mining Journal called the HEDGE HOGS which properly described the many gold companies - from juniors to majors - that may have killed their Golden Goose with derivative hedging programs. I would say that Newmont's loss of 2000 million is clear and present proof that I have been right for years. But who listens?
There is another reason why many gold shares have under performed. I was in Toronto last week visiting key movers and shakers in the gold business. While there, I learned that more than 50% of the clients of investment banks that cater to gold producers are hedge funds. The companies are so hungry for money that they see green as the main qualification for acceptance. I would refuse money from hedge funds as I have told them to go away when they called me. Some say I am the IR man from hell. Well, maybe they are right.
The play of the hedge fund is to take a gold company financing they like at maximum allowable discount to market plus of course options. They could be illegally short prior to closing the deal or legally short thereafter. That locks in the maximum, plus or minus, discount as a profit. The hedge fund can then sell short every rise without any risk against their warrants or options. No wonder these situations act poorly in the marketplace.
I have shown you many times that even percentage juniors involved with a major that has negotiated for themselves and on behalf of the junior a development loan with a derivative attached (known as a non recourse development loan) has a derivative risk.
Only those companies that have finance via equity (damn few) or are free of derivatives (as I assume RGLD continues to be) will in my opinion survive.
I believe some have figured it out. I certainly have. There is nothing I tell you to do that I do not do myself.
This is fact and by now you know it.
I received a concerned email regarding why there seems to be a rash of senior executives retiring or quitting from the top to the middle tier in the gold group. The question can be answered in nine words: short of gold over the counter derivative hedge positions.
Some time ago, I was speaking with the CEO of a small gold producer. He announced to his stockholders with great pride that the development loan negotiated by the major for his company's project was a non-recourse loan. I took him through the transaction to show him that his company actually had a derivative risk that could in a bull market for gold kill the economics of his project or dilute him to a 10% net profits interest which in reality means zero. He offered his resignation to his Board about two months later. The new management hasn't a clue what they face.
Therefore, there is a chance that many mid-tier and higher tier gold shares may under perform or fail to perform at all in a major generational bull market in gold.
In early 2000 I ran a cartoon in the Mining Journal called the HEDGE HOGS which properly described the many gold companies - from juniors to majors - that may have killed their Golden Goose with derivative hedging programs. I would say that Newmont's loss of 2000 million is clear and present proof that I have been right for years. But who listens?
There is another reason why many gold shares have under performed. I was in Toronto last week visiting key movers and shakers in the gold business. While there, I learned that more than 50% of the clients of investment banks that cater to gold producers are hedge funds. The companies are so hungry for money that they see green as the main qualification for acceptance. I would refuse money from hedge funds as I have told them to go away when they called me. Some say I am the IR man from hell. Well, maybe they are right.
The play of the hedge fund is to take a gold company financing they like at maximum allowable discount to market plus of course options. They could be illegally short prior to closing the deal or legally short thereafter. That locks in the maximum, plus or minus, discount as a profit. The hedge fund can then sell short every rise without any risk against their warrants or options. No wonder these situations act poorly in the marketplace.
I have shown you many times that even percentage juniors involved with a major that has negotiated for themselves and on behalf of the junior a development loan with a derivative attached (known as a non recourse development loan) has a derivative risk.
Only those companies that have finance via equity (damn few) or are free of derivatives (as I assume RGLD continues to be) will in my opinion survive.
I believe some have figured it out. I certainly have. There is nothing I tell you to do that I do not do myself.
This is fact and by now you know it.
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