Gold Dinar: An Economic and Strategic Response to Chaos
November 18, 2002
by Michael O. Billington
Mounting concern around the world that the Bush Administration is madly threatening to drive the world into perpetual warfare, while doing nothing to address the global financial-economic collapse, has led to the introduction of a number of defensive measures by nations and groups of nations acting in concert. One such measure is the proposal for creation of a Gold Dinar, intended as a replacement for the dollar as the currency of trade among nations. With a war against Iraq looming on the horizon, and U.S. threats against Saudi Arabia escalating in the establishment's institutions and publications, it is increasingly probable that the Gold Dinar policy will be implemented in the near term, among certain Islamic nations at first, and potentially expanding to include non-Islamic nations.
Malaysian Prime Minister Dr. Mahathir bin Mohamad hosted a two-day seminar in Kuala Lumpur on Oct. 22-23, called "The Gold Dinar in Multilateral Trade." This was the second major conference in Malaysia on this subject involving representatives of members of the Organization of Islamic Conference (OIC). The first conference, "Stable and Just Global Monetary Systems," held in August, announced that the Gold Dinar would be implemented as a bilateral arrangement between Malaysia and certain unspecified partners by the middle of 2003, and extended to multilateral agreements over time. At the more recent seminar, Bijan Latif, the head of Iran's Central Bank, offered to support the establishment of a secretariat in Malaysia to coordinate the development of the Gold Dinar policy. Dr. Mahathir supported the idea.
Not a Gold Standard
In his speech to the October seminar, Dr. Mahathir made clear that the proposal was not intended to establish a gold standard (as put forth by fixated "gold bugs" around the world), but to return to the Bretton Woods policy of a gold-reserve system, which was destroyed when President Richard Nixon removed the dollar from a fixed peg to gold on Aug. 15, 1971, allowing currencies to float at the whim of speculators. Dr. Mahathir reminded the participants, that after World War II, "when the Allied nations met in Bretton Woods to determine the principle for the rate of exchange of international currencies in order to facilitate trade, they decided to use gold as a standard." This worked until 1971, when "the market claimed that it could determine the exchange rate through the demand and supply of currencies freely traded in the market. But the profiteers moved in and manipulated the value of the currencies so that there was chaos in terms of exchange rates of currencies."
The Gold Dinar policy intends to return to the former, superior policy. Tan Sri Nor Mohamed Yakcop, an economic adviser to Dr. Mahathir, explained the system at the August conference as follows, using trade between Malaysia and Saudi Arabia as an example: "Malaysian exporters will be paid in ringgit [the Malaysian currency] by Bank Negara [the Malaysian National Bank] on the due date of exports.... Similarly, the importers will pay Bank Negara the ringgit equivalent of their imports. The Saudi Central Bank will do the same for its exports and imports. Say, at the end of a three-month cycle, the total exports from Malaysia to Saudi Arabia is 2 million Gold Dinar, and the total exports of Saudi Arabia to Malaysia is 1.8 million Gold Dinar. Therefore, for that particular three-month cycle, the Saudi Central Bank will pay Bank Negara 0.2 million Gold Dinar. The actual payment can be by way of the Saudis transferring 0.2 million ounces of gold in its custodian's account in the Bank of England in London, to Bank Negara's account with the same custodian. The important point to note here, is that the relatively small amount of 0.2 million Gold Dinar is able to support a total trade value of 3.8 million Gold Dinar."
The weakness of the system as it is now proposed is that gold, too, is subject to speculation, especially if it is pegged to a currency such as the dollar, which is heading for a plunge due to the collapse of the U.S. banking system. Dr. Mahathir is aware of the problem: "Gold prices can also be manipulated," he said, "but not as easily as the U.S. dollar or other currencies.... Speculation and manipulation will not be as easy as when local currency is valued against the U.S. dollar."
EIR Founding Editor Lyndon LaRouche has proposed that the necessary return to a Bretton Woods system of fixed exchange rates must also peg currencies to a "basket of commodities" rather than to gold, as a means of basing currency valuations to the real economy, rather than tying the real economy to a speculative entity (see Documentation). Although the Gold Dinar proposal assigns a value to gold in terms of dollars, Dr. Mahathir suggested in his speech that he is thinking along the lines of a "basket of commodities": "The value of one Gold Dinar is one Gold Dinar, no matter what the exchange rate of a currency is against the Gold Dinar. If the value of goods and services is expressed in Gold Dinar, the value remains the same, no matter which country is involved in the trade."
Whatever the case in this regard, the discussion and implementation of the bilateral or restricted multilateral Gold Dinar policy can provide a much-needed defense against the collapse of the dollar-centered financial system, and could contribute to a more durable global solution in the near future.
Strategic Necessity
Dr. Mahathir emphasized that the Gold Dinar policy is being driven by the crushing reality of the economic and strategic crisis. The disastrous situation in the Holy Land, the terrorist attacks of Sept. 11, 2001, and the threatened war on Iraq, have resulted in "the whole world's economy being unable to grow," he said. "The West, and in particular the Americans, are very angry. So are the Muslims. Angry people cannot act rationally." He concluded his speech: "Of course, the Gold Dinar can be a trading currency for all countries, not necessarily Muslim countries. But Muslim countries are in the best position to demonstrate the viability of the system, ... and in the process, show the world that they are capable of growing with stability and peace. And this will do more towards countering oppressions by their enemies, than the futile violent retaliations."
Other voices are also warning that the current folly in Washington will only hasten this break from the bankrupt IMF system. James Sinclair, the head of the mining company Tan Range Exploration, said in an Oct. 28 editorial in Financial Sense Online: "It is perceived, and correctly so, that the Islamic world is controlled via the use of the U.S. dollar as the main settlement currency.... I am told there is a significant possibility that when the U.S. attacks Iraq, the united Islamic salvo back will be at the U.S. dollar via the Gold Dinar." The Saudis, he says, "are less likely than most observers think to rescue the dollar this time."
In fact, the Saudis are already repatriating deposits from the United States, as reflected in the increase by $30 billion in deposits in Saudi banks in September.
Sinclair also notes, as did Bijan Latif of the Iranian Central Bank, that "the establishment of a gold-based currency is rebellion against the IMF, as it is distinctly forbidden under IMF rules." Sinclair adds: "The advent of the Gold Dinar would be the 'nadir' of the IMF and World Bank."
Other commentators have noted the concern in Saudi Arabia that the United States may freeze Saudi assets in U.S. banks, forcing them to consider the Gold Dinar as a replacement for the dollar, and dumping dollar holdings altogether if necessary. As amazing as this sounds, given the long history of U.S.-Saudi friendship, there has been a drumbeat of anti-Saudi hysteria in the United States recently, escalating since the infamous presentation before the Defense Department's Defense Policy Board on July 10 by the RAND corporation's Laurent Murawiec, which declared Saudi Arabia the mother of all terror, and calling for the overthrow of that country's government and other Arab "dictatorships" (see EIR, Aug. 16, 2002). Although Murawiec was fired by RAND for this mindless diatribe, Richard Perle, who runs the Defense Policy Board, was never publicly reprimanded, let alone fired, and the Saudis took note.
Even more blatant was the report issued by the leading think-tank of the American establishment, the Council on Foreign Relations, in October, "Terrorist Financing." The report is the work of a task force, headed by Maurice "Hank" Greenberg of the AIG insurance cartel, himself a notorious money-launderer. The report castigates Islamic charities in general, but hits Saudi Arabia in particular: "For years, individuals and charities based in Saudi Arabia have been the most important source of funds for al-Qaeda; and for years, Saudi officials have turned a blind eye to this problem," says the report. Making their intentions clear, the CFR adds: "It may well be the case that if Saudi Arabia and other nations in the region were to move quickly to share sensitive financial information with the U.S., regulate or close down Islamic banks, incarcerate prominent Saudi citizens or render them to international authorities, audit Islamic charities, and investigate the hawala system-just a few of the steps that nation would have to take-it would be putting its current system of governance at significant political risk." Nonetheless, they argue, the Bush Administration must proceed, and stop pretending that "Saudi Arabia is being cooperative, when they know very well all the ways in which it is not."
With this madness as establishment policy, the Saudis, and others, may well see no choice but to pull out of the dollar-based system. This is one reason for the great interest in LaRouche and his proposals in the Mideast today. It may well lead to the timely adoption of the Gold Dinar policy among Islamic nations, and progress toward a New Bretton Woods monetary system.
AFRIKANDER LEASE EXPANDS
Aflease has been totally transformed since my first article on this company six months ago. From an open pit operation aiming at that time to produce 70,000 ounces per annum, the company has since raised sufficient equity finance to expand into underground mining, build a new 200,000tpm mill and processing plant, initiate a major exploration program on a long-ignored relatively high-value gold reef, make a significant acquisition and build up a team of top mining people capable of taking the company to a point where production will be at least several hundred thousand ounces per annum.
If the company can achieve even a fraction of what it expects and anticipates, it will have considerable upside potential. I will discuss the developments in approximately chronological order.
My last communication mentioned the fact that the Aflease geologists had been able to consider all the past geological input from previous miners and past drilling programs. For various reasons this compilation had never been done by any of the previous operators at Aflease. The data revealed the possibility of a much greater deposit of relatively high-grade (8g/t) ore on the Bonanza Reef than had previously been thought possible.
The company is actively exploring and drilling the Bonanza Reef in an attempt to prove or disprove this thesis. The company’s "September Update" refers to the expectation that the Bonanza resource will be increased from 2m ounces to an anticipated 7m ounces, but more dramatically, that it possibly "could more than double AFL’s resource base". The Aflease resource base was stated to be in excess of 30m ounces, so a doubling of this number would be a significant new discovery. At this stage caution is required and we should put this possibility into the "Nice if it Happens" basket until more drilling has been completed and the results are made available.
A placement of 20.5m shares at a price of R6.50 (65cUS) was made for cash to Jipangu Inc, a Japanese gold investment company. These funds have been received. The funds will be used to build a new CIL plant to treat 200,000 tons of ore per month and to develop underground reserves for mining when the new plant is commissioned in April 2003. This expansion is thus being funded with minimal or no recourse to debt.
Recently Aflease announced the acquisition of the New Kleinfontein group of mines, full details of which will be available in a circular to shareholders in the near future. This is an important new development as it shows that the company is prepared to expand by acquisition as well as by organic growth. A further aspect of the acquisition is that it is likely to result in Neal Froneman and his team, reputed to be one of the top underground mining teams in South Africa, becoming Aflease shareholders.
This fact has led to market speculation that Froneman and his group will in due course become part of Aflease management team.
Some additional points about Aflease include the following:
1.The company has already complied with the S African black empowerment regulations and has received an undertaking that it is clear for the next 10 years. In addition an Employees Trust has been established that will in due course become the empowerment partner.
2.The company has never hedged and has stated that it will never hedge forward production.
3.The management has not voted itself large share options or big salaries. Everyone has shares in the company paid for with their own cash. The chief executive officer has 18% of the company.
4.Aflease is a single company, not being part of a group of companies with a joint promotional policy.
5.The company follows a deliberate policy of not promoting itself, at least at this stage. Management’s attitude is to get the mining side right first before advertising the company. This attitude can be frustrating but one cannot complain about such a conservative approach.
6.As an example of this conservative approach, the mining plan set out in the "September Update" indicates that mill throughput is planned to be 200,000 tons per month, but of this only 17,000 tpm (8.5% of possible mill throughput) is scheduled to come from the richer Bonanza Reef. Based on this minimal production from Bonanza, the company projects annual earnings of R1.25 (12.5cUS) per share once the new CIL plant is in full production. Quadrupling production from the Bonanza Reef from 17,000 tpm to 68,000 tpm (to 34% of available mill capacity) would double these profits. (See Appendix below for the calculations.)
7.Aflease has announced a new acquisition that has 3m ounces in reserves and resources plus another 7m ounces that management hopes to prove via an ongoing drilling program over the next 6 months.
8.Projected production from this acquisition (once yet another new CIL plant has been constructed) is stated to be at least 350kg per month (135,000 ounces pa). This is a conservative estimate as it appears to be based on reserves of only 3m oz that would allow for a life in excess of 20 years. Production will almost certainly be higher, possibly 300,000oz pa, if the resource proves to be 10m oz as hoped for.
9.The company's projected production from the acquisition of 135,000 oz pa at an indicated profit margin of 100% would produce after tax earnings of the order of 80c (8cUS). If ore reserves are proved to be 10m oz in due course, and production subsequently exceeds 300,000 oz pa, the profit would be closer to R2.00 (20cUS) per share.
10.The company’s two conservative profit projections (i.e. from the Aflease property and from the new acquisition) of R1.25 and 80c, respectively produces a total of R2.05 (20cUS) per share, these earnings being calculated at the present gold price of around $320.
11.As I write the Aflease share price is approximately R5.60 (56cUS), making the prospective PE Ratio 2.8 some 18 months hence.
12.The company has a policy of paying 33% of profits as dividends, thus one could expect a dividend of about 7cUS in about 18 months time, a potential dividend yield of 13%.
13.The company has a level 1 Nasdaq listing under the code AFKDY but is expected to upgrade to a level 2 listing in early 2003 when it will be quoted in the same fashion as DROOY, Harmony and Goldfields. The code in Johannesburg is AFL.
14.Next year when the expansion program is complete and the new exploration drilling results are available, the company is likely to undertake institutional briefings in the USA and promote the company at gold mining conferences.
While the company is long on potential, it will be judged on its delivery over the next year or so. The new CIL plant must be brought into operation on time and within budget – and it must work as anticipated. Cost levels must be within anticipated parameters. Exploration and development work must bring in the necessary ore to feed the new mill. The new acquisition must be brought to account in the anticipated fashion. There is much that can go wrong, but with an expanded management team, one can feel confident that the expansion will be brought to a successful conclusion.
The single most critical success variable for Aflease is the current exploration of the Bonanza Reef. As demonstrated in the Appendix below, increasing the Bonanza Reef percentage of mill throughput from 8.5% to 34% results in a doubling of profits. This increases the number of ounces from the Bonanza Reef from 40,000pa to 160,000pa. This level of increase can be tolerated given that the company already has 2m ounces of ore proven on the Bonanza Reef. If the proven reserves/resources on Bonanza reach the expectations of 7m or more in due course, then mill throughput could eventually be increased beyond the 34% level with a further sharp increase in profitability.
If the exploration of the Bonanza Reef eventually does "double the company’s existing ore resource" of 30m oz, then Aflease will indeed be a bonanza. At this stage, this prospect must be relegated to the "Nice if it Happens" basket until more information becomes available.
I am mindful of Jesse Livermore’s philosophy not to exit a position too soon, but to wait for it to mature fully because gains tend to be maximised towards the end of a move. I thus remain a long-term investor in Aflease.
Alf Field
Comments or queries may be addressed to: ajfield@attglobal.net
Disclosure: The author has not been paid to write this article nor has he received any other inducement to do so. The author is a shareholder in the company and will benefit from any increase in the company’s share price.
Disclaimer: The author’s objective in writing this article is to invoke an interest on the part of potential investors in this stock to the point where they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell this stock. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions in the stock.
APPENDIX.
Assessment of potential Aflease profitability using the mining plan as outlined in the company’s "September Update", based on the existing mining property and excluding the potential profits of the new acquisition. Revenue is based on a gold price of $325 and a Rand/US$ exchange rate of 10.5.
CASE 1
DetailsOpen CastPads/SlimesBonanza U’Ground Total
Tons p/m133,00010,00017,00040,000200,000
Grade diluted1.18g/t0.41g/t6.11g/t2.5g/t
Production p/m156.9kg4.1kg103.9kg100.0kg364.9kg
(140,000oz pa)
Revenue p/mR17.21mR0.44mR11.40mR10.97mR40.0m
Cash CostsR65 p/tR22.5 p/tR175 p/tR150p/t
(Mining, processing and overheads)
Costs p/mR8.65mR0.22mR2.98mR6.0mR17.8m
Op. Profit p/mR8.56mR0.22mR8.42mR4.97mR22.2m
Annual ProfitR102.7mR2.64mR101.0mR59.6mR266.5m
Earnings per share before tax and amortisation: on 186m shares – R1.43 (14.3cUS)
On 173m shares – R1.54 (15.4cUS)
Note: Share capital before the new acquisition was 173m shares and post the acquisition the issued capital will be 186m shares. The above figures do not include any profits from the new acquisition.
CASE 2
In this case it is assumed that the production from the Bonanza Reef will increase to 68,000 tons per month (or 4 times the level assumed in Case 1) at the expense of throughput from slimes and open pit. In this instance profits would increase as follows:
Additional profits from Bonanza – 3 x R101m = R303m
Less profits forfeited:
10k tpm Pads/Slimes profit -R2.6m
41k tpm Open Cast profit - R31.4m -R34m
Additional annual profitsR269m
Add profits as calculated in Case1 R266m
New Annual Profit before tax and amortisation R535m
Earnings per share before tax and amortisation: - on 186m shares – R2.88 (29cUS)
On 173m shares - R3.09 (31cUS)
NOTE: These calculations are not meant to produce definitive profit forecasts for Aflease. These figures do, however, indicate that the company’s forecast of R1.25 per share for earnings after the current expansion is complete is probably a realistic and conservative forecast. The most important reason for showing these figures is to demonstrate the extreme sensitivity of Aflease future profitability to the level of mill throughput that can be obtained from the Bonanza Reef.
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