Change of managment needed now, page-7

"So, let us say BDR know they can survive over the next two years, on producing 50k a year, of high grade ore, at 3700 BRL. They should then immediately forward sell or hedge or how you do it 100k at 3700 BRL.

Let us say POG goes down. Well, you survive on your hedge. Let us say POG rockets - say to 4500 BRL. Well, you still provide the 100k at 3700 - as you contracted. AND you produce all you can to obtain 4500 on the oz above 100k"

Well that probably explains why you are not in charge of a gold mine. You can't just "high" grade an open pit mine for a while and then start "low" grading it again. It is actually pretty simple to protect the mine. You just need a conservative mine plan from the start, one that assumes a realist long run average gold price in the currency in which sales are intended to be made and one that includes realistic estimates for the total mining costs in that same currency (together with a good measure of the expected gold recoveries).

Armed with this information and assuming your capital cost is relatively fixed and you known the treatment capacity of your plant, it is a pretty simple exercise to maximise the future cash flow by choosing the right cut-off grade. A lower cut off grade might increases the mine life but won't necessarily maximise the present value of your cash flows. A higher cut off grade eventually reduces the life of the mine and also the present value of your cash flow. So choosing the cut off grade that maximises the present value of your cash flows under a realist life of mine gold price assumption is the trick. Often the gold price and mining cost assumptions that companies make are far too optimistic from the start and that's when a mine gets into trouble. You can't chop and change the mine plan. You've just got to base your mine plan on conservative assumptions in the first place. Assumptions that take into account the mean reversion nature of markets for commodities. Some mines just should not be developed. I'm not saying BDR's mines are in this position, as I don't know a lot about them, but for me the mine plan is number one, hedging should only come into play if it looks like even the most conservative commodity price assumptions are looking to be proven wrong.

Eshmun