The Real Cost of Gold

From National Geographic: “In all of history, only 161,000 tons of gold have been mined, barely enough to fill two Olympic-size swimming pools.”

Like many of his Inca ancestors, Juan Apaza is possessed by gold. Descending into an icy tunnel 17,000 feet up in the Peruvian Andes, the 44-year-old miner stuffs a wad of coca leaves into his mouth to brace himself for the inevitable hunger and fatigue. For 30 days each month Apaza toils, without pay, deep inside this mine dug down under a glacier above the world’s highest town, La Rinconada. For 30 days he faces the dangers that have killed many of his fellow miners—explosives, toxic gases, tunnel collapses—to extract the gold that the world demands. Apaza does all this, without pay, so that he can make it to today, the 31st day, when he and his fellow miners are given a single shift, four hours or maybe a little more, to haul out and keep as much rock as their weary shoulders can bear. Under the ancient lottery system that still prevails in the high Andes, known as the cachorreo, this is what passes for a paycheck: a sack of rocks that may contain a small fortune in gold or, far more often, very little at all….

Even at showcase mines, such as Newmont Mining Corporation’s Batu Hijau operation in eastern Indonesia, where $600 million has been spent to mitigate the environmental impact, there is no avoiding the brutal calculus of gold mining. Extracting a single ounce of gold there—the amount in a typical wedding ring—requires the removal of more than 250 tons of rock and ore.

Newspaper Bankruptcy Watch: Lee Enterprises

Corporate debt is a bit like the piece of ricotta torte I had for dessert last night: it goes down very easily, but chronic overindulgence will constrict the arteries, strain the heart, and possibly even kill you. And that’s exactly what is happening to Lee Enterprises, which publishes nearly 50 daily newspapers including the North County Times in San Diego County.

Lee Enterprises swallowed a staggering amount of debt over three years ago when it bought Pulitzer Inc., publisher of more than a dozen daily papers including the St. Louis Post Dispatch, founded in 1879 by Joseph Pulitzer. That turned out to be a disastrous move, as Lee is now in grave condition. Nearly 10,000 employees may find that come April, their employer can no longer survive in its present condition.

I decided to write about Lee after a friend who works for the chain asked what I thought of the company’s finances. Management was sugarcoating things, and my friend had no idea where things stood. (Full disclosure: I worked for the Lee owned Quad-City Times in the 1990s.)

Reading the company’s Dec. 31st 10-K filing led me to the conclusion that Lee Enterprises is already dead. A balloon payment of $306 million dollars is coming due April 28 and Lee, which posted a loss of nearly three times that amount last year, has flat-out admitted that it doesn’t have the cash.

The newspaper company can’t borrow its way out of this because its lenders have put it on a strict debt diet — no more sweets for you, Lee! They can’t borrow, they don’t have the cash, so Lee is left with few options. The company could sell assets to pay down debt but there’s not much of a market these days. Another option is a debt-for-equity swap, with the lenders becoming owners of the company.

Ultimately, it comes down to this: Either institutional investors that hold the secure notes will show mercy, or a bankruptcy judge will have to carve up the company’s bloated corpse and sell off the parts.

Lee’s stock closed at 56 cents today, down from $15 a share a year ago, and many on Wall Street think it hasn’t hit bottom. Lee’s short interest, a measure of pessimism in the company’s future, is one of the highest for any publicly-traded U.S. firm.

The Davenport, Iowa-based company’s difficulties are a symptom of the pain experienced by newspaper chains that used debt to finance growth in recent years. Tribune Corp., publisher of the Los Angeles Times and the Chicago Tribune, is in bankruptcy. McClatchy Corp., which loaded up on debt to buy Knight-Ridder in 2006, is struggling for survival.

When it acquired the St. Louis Post Dispatch in 2005 for $1.5 billion, Lee also assumed a $306 million debt, which is a twisted tale in itself.  Pulitzer borrowed the money in 2000 to gain control of the Post Dispatch and buy out almost all of the stake held by the Newhouse family’s Advance Publications. (Privately-held Advance owns Conde Nast, publisher of The New Yorker, Vanity Fair and others, and also publishes major metro dailies in Portland, Ore., and New Orleans.)

For 16 years, Pulitzer had been paying Newhouse half of the Post Dispatch’s profits under a “joint operating agreement” with a newspaper that no longer existed. Newhouse sold the St. Louis Globe-Democrat in 1984, and somehow got Pulitzer to keep paying it, even after the Globe-Democrat stopped printing a few years later. (Newhouse still gets 5 percent of the Post Dispatch profits.)

The bad news doesn’t end in April because the Putlitzer debt just keeps on dealing out pain. The $306 million is only the principal on the loan, which carries 8.05 percent interest annually. So the total bill is more than $600 million. And counting.

That’s the story of how a bad deal to buy out one newspaper chain is about to destroy two others.

The (Alleged) Reasoning Behind Wilkes' Release

I’ve been scratching my head over the 9th U.S. Circuit Court of Appeals ruling that freed Brent Wilkes from prison on $2 million bail while he appeals his conviction for bribing former Rep. Randy “Duke” Cunningham. The court’s reason for releasing Wilkes makes absolutely no sense at all.

First, a bit of background: The 9th Circuit granted Wilkes bail in March. Judge Larry Burns in San Diego required Wilkes to post collateral of $1.4 million. Wilkes pledged three homes, but Judge Burns ruled in June that it wasn’t enough as he had concerns over the value of the homes.

On Dec. 30, 9th Circuit Judges Thomas G. Nelson and A. Wallace Tashima apparently decided that the homes Wilkes pledged as collateral were suddenly worth more now than they were in June:

“While the district court (Judge Burns) has concluded that a personal appearance bond secured by $1.4 million in property or assets is required during the pendency of this appeal, we conclude that given changed market conditions which have resulted in a decline in the value of real property, Wilkes’ pledge of three properties subject to forfeiture is sufficient to assure his appearance during the pending of this appeal.”

That’s pure gibberish. If the housing market declines, homes are worth less, which means that Wilkes is even further from the $1.4 million threshold. Despite their cushy lifetime appointments, Judges Nelson and Tashima had to know that much. Maybe the court thought no one would notice.

I checked with Shaun Martin, a law professor at the University of San Diego who clerked for the 9th Circuit to see whether I was missing something. After reading the order, he was as confused as I was.

“That raises more questions than it answers,” he said.  Teading between the lines, Martin said the judges had grown impatient with all the back and forth and just wanted to move on. “You can fairly put the order down to frustration and needing to say something to let the guy go,” he said.

Wilkes Released

Two former defense contractors convicted of bribing former Rep. Randy “Duke” Cunningham are swapping places in the prison system. As Mitchell Wade prepares to head to prison following his sentencing last month, a federal judge granted $2 million bail for Brent Wilkes, who was serving 12 years for bribing Cunningham.

Wilkes has been fighting for release for nearly a year. The 9th U.S. Circuit of Appeals in March granted Wilkes bail pending appeal of his bribery, fraud, and conspiracy convictions.  Judge Larry Burns in San Diego, however, kept the 54-year-old Wilkes locked up over concerns over the value of the collateral he was posting to secure release.

Burns required Wilkes to post collateral of $1.4 million or 70 percent of his bail — seven times the typical 10 percent requirement. Wilkes pledged three homes subject to forfeiture, but Judge Burns said it wasn’t enough.

On Dec. 30, the appellate court ordered Wilkes’ release, ruling that the three homes was now sufficient “given changed market conditions which have resulted in a decline in the value of real property.” The court seems to be saying that a million bucks isn’t what it used to be.

Wilkes has been serving his time at Terminal Island in San Pedro. His former consultant, Mitch Wade, hasn’t yet reported to prison to begin serving his 30 month sentence.

The sentencing judge recommended that Wade serve his time at a prison “camp” in Petersburg, Va. Cunningham is serving 100 months in a similar prison camp in Tuscon, Arizona.