up +10% - to acquire ravenswood, page-12

re: ravenswood - interesting article This will have little bearing on their decision to proceed with Syama IMHO. Remember they will have a huge injection of capital once the options are exercised in 2005 and RSG should have little trouble obtaining debt finance to tie them over until the exercise date.

I have a strong suspicion that the purchase of this operation is as a result of the squeeze RSG is facing on their hedge position. RSG has a shocking hedge position this financial year from my calculations - my suspicions are further confirmed with the fact that the Ravenswood purchase is UNHEDGED.

Following is part of what i wrote on RSG's Hedge position a couple of months ago:

Resolute predict 155,000 ounce production next year, following points are details about their hedging for 2004:
- They have 116,000 ounces forward sold @ US$304
- They have sold call options: 25,000 @ AUD$665 (no real problem here as this shouldn't get exercised unless aussie dollar tanks or gold skyrockets)
- They have sold call options: 105,000 @ US$362 (BIG PROBLEM). If POG holds, this will be exercised, and they will have to roll most of the 116,000 ounces forward sold into 2005.

Following is a quote from one of Resolute previous reports: "Resolute's hedge book is flexible in nature and the forward sales contracts maturing in the years ending 30 June 2003 and 30 June 2004 can be rolled to later dates at the Company's election. This gives the Company the choice of fully participating in spikes in the gold price in the short to medium term."

Nice spin doctoring RSG: defer the massive out-of-the-money hedge positions to capture short term gold spike? Eventually these positions have to be closed and the longer they delay the worse the position is getting as the gold pice rises. They may be able to defer the forward sales but i doubt they can defer the call options being exercised.

A clever purchase of an unhedged producer will allow RSG to satisfy these hedges quickly and somewhat 'mask' or 'dilute' the negative effect of the closing out of theses positions - the average realised gold price this financial year will still be way below the spot prices however (though it may improve with some contribution from the Ravenswood purchase).

However in the grand scheme of things this is positive for RSG, they now will have a substantial prescence in Australia, they have diversified their operations away from a one country/one mine operation, they have a sound balance sheet, they have solid growth prospects, and consequently they will attract more attention from the Institutions.

I hold both RSG and RSGO.