I was researching EURO Resources this morning because Golden Star Resources (GSS) was involved with a prospect of EURO's. EURO mentioned something about having a hedge against future production of 100,000 ounces of gold. The note said they had reduced the hedge by 50,000 ounces to 50,000 ounces.
I got digging through the balance sheet and look what I found in their third quarter report dated Nov. 15th 2007: The company in their list of liabilities has a Macquarie Bank Limited loan of 453,000€. Here's how that low originated:
The Company’s bank borrowings comprise a loan from Macquarie Bank Limited (“Macquarie”). This was drawn in two tranches:It appears all they owe on the loan to buy the Rosebel Royalty is the 453,000€. But the bank wanted its loan to be protected in case Gold went down and required Euro to hedge a portion of the Rosebel royalty revenue against fluctuations in the market price for gold.The first tranche of $6 million was drawn on January 7, 2005, and used to pay the first installment of the Rosebel purchase price. The loan principal was repayable in nine equal quarterly installments of $666,667 commencing July 29, 2005. Final maturity is July 29, 2007. On April 26, 2007, Macquarie agreed to extend the principal payment due on April 29, 2007 until January 29, 2009. A fee of $13,333 was charged by Macquarie for this extension.A second tranche of $3 million was drawn on September 30, 2005, and used to pay part of the second installment of the Rosebel purchase price. The principal amount is repayable in five equal quarterly installments of $600,000 commencing on October 29, 2007. Final maturity is on October 29, 2008.
EURO therefore concluded two forward sale agreements for gold:The second hedge is still outstanding: 57,000 ounces sold at $458.50. Gold is currently at $803.50! (803.50 - 458.50 = 345)A forward sale agreement for 57,000 ounces of gold at $421 per ounce for settlement in 10 equal calendar quarter amounts of 5,700 ounces, commencing January 2005, settling 29 days after each calendar quarter. EURO settled its last forward sale agreement of 5,700 ounces of gold at $421 per ounce on July 31, 2007.A second forward sale agreement for 57,000 ounces of gold at $458.50 per ounce for settlement in 10 equal calendar quarter amounts of 5,700 ounces, commencing July 2007, settling 29 days after each calendar quarter.
BOTTOM LINE: The hedge of 57,000 ounces to make a bank safe on a $3 Million loan has gone against EURO (345 X 57 000) by $19,665,000!
EURO writes on its Home page
At current gold prices, the Company expects to receive in excess of US$8 million in revenue from Rosebel during 2007. Management is actively seeking the acquisition of additional royalty interests.It will take almost three years of revenues to buy the hedge back at current prices. Every $10 increase in the price of Gold is another minus $570,000 to EURO. Let's hope when EURO buys more royalties that hedging future production is not considered for the good of shareholders.
EURO Resources (TSX: EUR) Golden Star Resources (GSS) Mover Mike
