Re: LHG - Lihir Gold
April 23, 2007
The Economist Spouts More Rubbish About Gold
Last week the mighty US dollar fell below US$2:£1 and gold pushed up towards the US$670/oz mark. Nothing very unexpected about these two statistics to most people, but to the Economist they must have come as a mighty shock. In the April 8th edition of that august magazine it carried an article entitled “A Fine And Fickle Friend” and the sub-title was “ Gold is a useful friend, but only for a fortnight.” The fortnight is now up and the writer is clearly hoist by the Economist’s traditional contempt for gold. A look back through the files shows that the Economist published a very similar article on April 17th 2006 to which we responded with one entitled “The Economist Seems to be Stuck In The Dark Ages with Its Views On Gold.” What is so difficult to understand is why the Economist attacks gold and does not treat it simply as another form of investment. The masses of investors who have become involved in the gold exchange traded funds cannot all be wrong.
Mention is made by the Economist of the fact that the biggest holders of bullion have been central banks and this is described as a relic of gold-standard days. By and large, says the Economist, central banks have not been enthusiastic holders, and have had, on occasion, to agree not to sell their stockpiles. This is a rather tendentious reference to the Washington Agreement of 1999 when a number of central banks agreed not to sell more than 400 tonnes of gold a year between them. In fact they have sold well less than 400 tonnes per year and any potential overhang is limited by the fact that these banks now own only 20 per cent of the gold in the world. The question also has to be asked as to which central bank wants to risk the condemnation now being heaped on Prudence Brown for selling a large slug of the UK’s gold reserves at the turn of the century.
Prudence is now digging himself into another hole by pushing for the International Monetary Fund to sell part of its gold reserves to meet its future financing requirements. He is quoted as saying that there was "no doubt" that gold sales were potentially part of the I.M.F.'s likely future financing. He then went on to claim that an independent report into future IMF financing had recommended that any gold sales should take place in a "measured way." Presumably he was referring to something similar to the crass way in which the Treasury sold the UK gold in a series of auctions. All traders had to do was sell gold as it fell prior to each auction and buy it back at a higher price once the auction was over. The result was that the UK inevitably got bottom dollar as anybody of a commercial bent would understand.
So much for politicians and economist, few of whom have held a real job in their lives. What about the men at the forefront of the gold industry? At the leading Australian gold producer Lihir Gold a decision has been made to close out its hedge book, neutralise debt and raise funds for expanding and developing its existing assets. This has to be a massive bet by the company, which is focused on gold in Papua New Guinea. The company is going to raise A$1.07 billion through a share issue at a 32 per cent discount to the price ruling this time last week. This will be supplemented by a further A$120 million at a price to be determined by the institutional bookbuilding process which makes A$1.2 billion in all – quite a sum.
The share issue is split between A$856 million which will go to institutions and is fully underwritten by Goldman Sachs JBWere and Maquarie Equity Markets as is the placement. The balance of A$214 million is reserved for retail investors and will not be underwritten. The hedge book contains 934,500 ozs gold and there is a 480,000 oz gold loan which will be repaid early. On the basis that the expansion of production at the Lihir mine will cost around A$660 million, the company is going to spend a similar sum on its hedge book thought it should be borne in mind that money may have to be spent on its recent acquisition of Ballarat Goldfields.
It is the company’s shareholders who pressurised for this move as they want more exposure to the gold price in future as Lihir is forecasting production of 800 to 830,000 ozs this year and will be pressing on towards the magic million ounce mark thereafter. The view that the gold price will go up is certainly supported by some influential commentators such as Peter Grandich, editor of the Grandich Letter, who said at the end of last week that “a near-perfect storm has aligned both technically and fundamentally for gold. A test of the 2006 highs around US$735/oz is not a question of if, but when.” He was supported by James Moore, metals analyst at TheBullionDesk.com, "strong physical buying has been seen on dips, while the current bearish sentiment toward the U.S. dollar may encourage diversification away from the greenback.”
Looks like the Economist is marching out of time with the rest of the financial world. At least it knows that Prudence Brown and Little Balls are in the same predicament, but it would be wise to remember Lord Chesterfield’ maxim that everyone is known by the company they keep. Anyway the Chinese would probably be delighted if the IMF sold off some gold as it would enable them to switch some of their massive reserves out of dollars that much more easily.
Source:
www.minesite.com