Gold price prompts gold loan paybacks

One such producer is Giant Yellowknife Mines (TSE), which says it has prepaid the remaining balance of its gold-loan facility entered into in 1987 and drawn down in June, 1988. Gold recently moved over $400(US) per oz after spending most of 1989 well below that level. (Its low in London this year was $355.75 in September.)

Giant Yellowknife says that of the original 87,454 oz borrowed last year, 68,213 oz remained to be paid in quarterly instalments extending to March 31, 1993.

The gold was originally sold in June, 1988, at an average price of $572(C) per oz; the balance outstanding has now been purchased at about $485. The company says its pre-tax gain is $5 million.

Gold loans, in vogue in late 1987 and throughout 1988 when bullion prices were higher, allowed producers to finance mining projects at a relatively low borrowing cost. A company would borrow gold bullion from a bank and then sell it in the open market for cash. The company obligated itself to repay the loan in physical gold from its mining operations within a few years.

Yorkton’s Peter Miller points out the gold loans carried an interest rate of up to 3%. While that rate may seem low, gold sitting in a bank’s vault earns no interest at all. Miller says a big portion of the outstanding gold loans was arranged when gold was in the $450-500(US) range.

Rick Cohen of BBN James Capel says gold loans came to a virtual standstill when gold dropped to $360. Companies who began buying gold in the market to pay off gold loans they may have purchased at $425-450, he says, have in fact been eliminating debt using 80 cents dollars.

“With renewed investor demand combining with purchases by the companies, gold demand is rising. Also, as gold loans are repaid, the production destined for repayment of these loans isn’t available for spot sales,” says Cohen, making an argument for a possible sustained gold price rally.

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