NEW YORK -- Unable to convince its holdout hedge counterparty, believed to be Goldman Sachs, to take an offer of 50 cents on the dollar to settle its claim against the Yandal gold hedge book, Newmont [NEM] has put the Australian operation into preliminary liquidation following a board resolution on Wednesday evening.
Yandal consists of the Bronzewing, Jundee and Wiluna mines in Western Australia which produced a combined 145,000 ounces of gold at a total cost of $356 per ounce in the first quarter of this year. The division is non-recourse to Newmont.
This marks the worst gold hedging blow-up since the October 1999 when rising gold prices drove Ashanti [ASL] and Cambior [CBJ] into near bankruptcy as counterparties made margin calls. Since then gold producers have been at pains to slash hedging or reassure investors that they are margin free.
Yandal is now in voluntary administration in terms of Australian commercial procedure and in terms of that process Newmont intends refloating the operations for an effective price of $200 million, or 40 cents on the dollar for hedge counterparties and Senior Note holders who have not accepted an offer made at the end of May.
Newmont has been wrangling with Yandal creditors since it acquired the division from Normandy in early 2002. This past December and January some hedging counterparties to Yandal exercised “right-to-break” clauses that entitled them to demand accelerated cash settlement. The payouts further strained the ailing Yandal that had been excessively hedged in the first place, and would not be able to pay any further claims out of its cash flow.
Efforts to negotiate for breathing room to allow Newmont to destress Yandal were to no avail when Goldman Sachs demanded $46 million in late May citing an “early termination clause” that cumulated its future potential right-to-break payments. Newmont immediately initiated a $219 million offer to Note holders and counterparties citing insolvency if they refused to accept.
Whilst the administrative process is not Newmont’s preferred option, it still moves the number one miner closer to its goal of having all its gold production unhedged. The company has been aggressively slashing the large hedge book it acquired with Normandy and is expected to report a negligible amount of hedged production by the end of this year as it retires an estimated 1.1-1.5 million ounces of gold.
Freed of the constraints imposed by the hedging covenants, Newmont is likely to boost investment on Yandal to add reserves and resources, as well as correct its up its
Yandal has been soaked in controversy since it was used as the vehicle by which former Normandy boss Robert Champion de Crespigny and fellow Aussie magnate, Joseph Gutnick, gained control of Adelaide based Great Central Mines at a fabulous discount.
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