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| Q | Can you give me an example of exactly how a junior can suffer loss on their major's derivative position? I am confused. |
| A | Here is a hypothetical example in order to explain how loss occurs.
Assume that Sutton Resources still existed and had done a 49% Sutton / 51% ABX JV deal on the Bulyanhulu Mine. Now assume that ABX in order to finance the Bulyanhulu Mine infrastructure build had, as manager, for the property selected a financial package for the required development loan that was non-recourse and therefore required a derivative as non-recourse lending does. At the time of the Sutton/ABX percentage JV deal gold was around $280. The derivative would have sold gold at that price relative to 10 years forward. Now, let us assume that gold has risen in price now to $400 per ounce. Clearly all the gold has been sold a lower levels than that. Sutton who is the junior in the percentage JV deal with ABX (for this hypothetical example), at the least will receive income at a lower rate than they would have if there was no derivative. This is true because derivative loses decrease the price of gold received as derivative gains increase the price of gold received via an account called deferred risk. Unknown, because, I believe, the derivative risk exists in the manner explained above and many juniors in this circumstance actually do not know that because it is not specifically spelled out in the agreement. |
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