02 February 2010

Perth Mint to acquire full ownership of AGR Matthey

Last week the three partners in AGR Matthey decided to dissolve their partnership. The Perth Mint will acquire full ownership of the gold and silver refining business in Perth and Johnson Matthey will acquire full ownership of the platinum and silver brazing alloys business in Melbourne. Newmont will exit from these businesses entirely but will continue to have its Australian-mined gold refined at the Perth refinery. There are still some conditions precedent that need to be met before the deal is concluded, but the partners see no reason why these will not occur.

It is a move I am very excited about as it gives the Mint direct control over the refinery’s output, which is typically between 300 to 400 tonnes of gold a year. I’m reminded of the old adage, "He who owns the gold, makes the rules", but of course the Mint doesn’t own the gold, its clients do.

The substantial physical inventories needed to support this throughput, and the Mint’s own stock, have been backing Depository client metal for many years. All this acquisition will do is change the refinery’s inventory from being listed as a metal receivable in the Mint’s financials to being a directly owned asset. This should increase the comfort factor for many Depository clients even though it doesn’t really change the fact that their holdings have been, and always will be, backed by physical.

I will be interested to see how the Mint’s critics and competitors try to spin this news against us. It does make it hard to argue that a business that refines 300 tonnes of gold a year “doesn’t have any gold”.

Maybe they’ll argue that we had to get the refinery to plug the imagined short position that they think we have. Apart from exposing their woeful ignorance of how our operations and a refinery’s work, the logical conclusion of such a position would be that the supposed short position is now plugged, making the Depository a totally safe facility!

For those not aware, the AGR refinery operations were originally established by the Perth Mint in 1899 when it was founded as the Perth branch of the British Royal Mint. In 1998 the refinery was combined with the refinery operations of Golden West to form the AGR Joint Venture and then subsequently merged with Johnson Matthey’s Melbourne refinery in 2002. So in a way the refinery business is just coming back to its home.


  1. Hi. New here and found my way from a comment at FOFOA. I've now read a few of your pieces and, although I am a gold bug,it is refreshing to read articles on gold that are not breathless hype pushing the sell side.

    Can I ask a couple of questions? Outside of Perth Mint policy, why is the buy/sell spread so very much higher on silver bars compared to gold bars? I cannot believe they are more difficult to cast.

    On a personal note. The buy price for gold cast bars is the same as for coins (at least at the Perth Mint), yet the coins carry a higher fabrication cost when purchased. As someone who for the first time has just bought a bar directly from the Perth Mint rather than my previous approach of ordering coins through my local coin dealer I am still in some doubt about this strategy. Of course I have read the official arguments for coins over bars, but do you have an opinion on this? Thanks.


  2. Thinking some more about my question on silver bars above, maybe they have to recast them because of tarnishing?

  3. Thanks for the comment. There are plenty pushing sell side so I'm more interested in talking about other matters.

    On the spread, I think this is to do with the relative lower value of silver compared to gold. Taking a theoretical example, if silver is $20/oz and gold $1000 and it takes $10 to mint a 1oz coin, then the minting cost for silver is 50% of its value ($10/$20) versus 1% for gold ($10/$1000).

    Obviously this is highly simplified and the costs of manufacture of silver v gold are not the same, but this is generally the sort of relative cost disadvantage of silver.

    Regarding the buyback prices, yes the Mint just sets one percentage rate for coins or bars for each metal. For us this reflects the fact that pretty much everything we buyback we melt. In most cases people want current year and unscratched stuff from us.

    Local coin dealers are more willing to sit on coins or bars in the hope they can resell them at above spot price depending upon demand, so they will offer different buyback prices (and usually better than the Mint to be honest).

    My opinion is that if you are buying because you think SHTF then coins are the way to go because people will be more likely to trust them when fiat is not around as coins are harder to fake.

    If you are buying to make money, then bars are better because the buy/sell spread is lower.

    Of course where we all expect the gold and silver price to go it probably won't really matter too much whether you paid 2% or 6% premium!

  4. Silver, being harder, is harder to work as well.

  5. Thanks Bron. Your silver comment makes a lot of sense and since, as you say, everything is melted anyway, my tarnished comment is irrelevant to the cost.
    I'm neither buying to deal nor because of fears about SHTF (although I think it will).I'm what might be called an inter-generational buyer trying to keep some value for my kids inheritance. So I'll stay with a mixture plus sovereigns for any emergencies.

  6. The US CFTC recently held a hearing on manipulation in precious metals markets. Surprisingly, one of the establishment testifiers (Jeff Christian) actually admitted the London gold market is leveraged 100-to-1. That is, unallocated gold accounts are run on a fractional reserve basis and delivery of 1% of the gold owed would leave the market with no actual gold to trade.


    Is Perth Mint preparing a contingency plan for this?

    Not just might the Mint experience a huge increase in demand but there may be a need for the mint to set its own spot price - a spot price based on actual supply and demand, rather than paper derivatives of gold in London and NY, backed by almost nothing.

  7. trevbus, very busy at the moment would like to do a proper answer but here is a quick one for the moment.

    From a risk management point of view the Mint has always operated on the understanding that London metal accounts are unsecured plus no statement by them one way or the other about backing. Whether this revelation is true, or how much % London metal is backed won't affect how we operate, which has always been very cautiously.

    Following on from that and re your comment about a "real" spot price, at this time the London spot price is still real to us because we are able to obtain physical metal at that price. If/when that proves not to be the case, we will base our Perth Mint spot on a combination of local supply/demand plus whatever external physical price we can.

  8. Thanks Bron,

    As a follow-up question, could a Perth Mint spot price be determined using instruments on the ASX (e.g. the ZAUWBA call warrants)? Could gold miners be allocated ZAUWBA warrants for their dore bars, and then place these for sale on the ASX? This would increase volume and allow the Perth Mint to facilitate a spot market without each transaction having to be processed by Mint staff?


  9. What your propose could be done. What I would rather propose to miners (when I get my current projects off my back) is that instead of selling their gold for cash, they leave it with the Perth Mint and give shareholders the option to have their dividends paid out in ZAUWBA shares (ie gold).

    Perth Mint can then just issue ZAUWBA to shareholders that want gold against the gold that was refined for the miner. For those shareholders wanting cash, miner sells that part of their gold to pay for the dividends.

    The advantage of directly issuing ZAUWBA is that the shareholders are better off because it eliminates the miner sell gold, shareholder buy gold steps, which only benefit bullion banks who make the spread between bid and ask prices.

    Thinking about it, it is probably better just to issue all shareholders with ZAUWBA as those that want cash dividends can just sell them.

    If anyone wants to start lobbying miners to do this, please go ahead. It is probably a necessary step anyway to convince them that shareholders want it.