Wednesday, June 28, 2006
Croesus Mining Declares Bankruptcy
I wrote in an earlier post about the trading halt in the shares of Australian gold miner Croesus Mining. In the last couple of days the firm went into "administration" the Australian equivalent of Chapter 11 after the Japanese Mitsui Bank refused to reschedule the gold hedging contracts between it and Croesus. Macquarie Bank in Australia had agreed to reschedule the hedging commitments. This means the value of the shares is likely totally wiped out. I won't write down the loss to my net worth (about 2.5%) until this is finally confirmed. At least some of it can be used as a short-term capital loss reducing the hit somewhat. The basic problem was that Croesus was not producing enough gold to meet its commitments to sell gold to the banks at the prices of the hedging contracts. Therefore, they would be forced to buy gold on the open market at a much higher price fill the contract. Macquarie was happy to reduce the monthly commitment. I suppose they thought that the price of gold will continue to rise so it doesn't matter if they have to wait a while for their cheap gold. And, additionally, they let a borrowing client survive to borrow another day.
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4 comments:
Hey Moom, I am back. Go take a look at the mortgage backied REIT fiasco's such as Crimmie Mae etc... Lesson for future self. Never, ever, ever buy complex hedging companies that claim to do one thing (make gold) yet really do another thing (gamble on futures). This is, quite appropriately "fools gold". Another trading point is don't ever buy a company that you can't explain what they do on a cocktail napkin and never buy a stock who's initial ipo prospectus is thicker that 1/2 of an inch. If it is thicker it's got too many disclaimer's and not enough ethics. Anyway, I'll post my humble and definite losses tomorrow should you wish to give it back with input. :-)
What Croesus did was easy to explain, but somehow I wasn't aware of the extent of their hedging. In the December quarterly report the position is stated and in retrospect sounds very bad, but the company didn't sound any concern. Importantly, the dates the contracts were for were not given, so there was no way to compare the gold due to the production. So I figured, OK they ain't going to make a profit on this gold, but didn't think they just wouldn't be able to supply it. Instead the firm was investing in exploration and development and trumpeting successful exploration results.
All I can say is "Been There Done That" It hurts to be lied or at the least purposefully misled. I have seen ATHM as well as INSP and others due serious portfolio damage so just take it as an educational experience and remember it. I am not so holy that I'd say similar thingsw have occured to me. I remember Compuware hurting me a lot a few years ago...
Oops that's do serious damage.
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