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GSS put/call info from latest 10-K

Put and Call Options

http://biz.yahoo.com/e/060329/gss10-k.html

We purchased gold put options ("puts") during 2005 to provide down-side gold price protection for a portion of our expected gold sales spread equally over the Bogoso sulfide expansion project construction period. This action reduced the risk of reduced cash flow from operations during the construction period that would otherwise have occurred as a result of a drop in gold prices. We sold call options ("calls") to offset the cost of a portion of the puts.

Each put gives us the right, but not the obligation, to sell an ounce of gold to a counter party on a specified future date at a contractually agreed upon strike price. Each put has a specified expiry date. The strike price of the put is set at a point below the spot market price on the date the put is established. The closer the put strike price is to the spot market price, the higher the cost of the put. We paid an average of $7.10 per ounce for the puts purchased in the second quarter of 2005 locking in an average strike price of $409.75 per ounce when the spot market price was between $427 and $429 per ounce.

A put, in effect, becomes an insurance policy that guarantees us a minimum gold price on ounces covered by the puts. Through our puts we have guaranteed that we will receive at least $409.75 per ounce for 140,000 ounces to be sold during 2006 and early 2007. If, on the expiry date, the spot market price is above the put strike price we will allow the put to expire unused. We are not required to deliver gold to cover a put.

Each call obligates us to sell an ounce of gold at a specified future date to a counter party at a contractually agreed upon price. If the spot market gold price exceeds the call strike price we will receive only the lower call strike price on ounces covered by the calls. We sell calls to and receive payment from a counterparty. If the counterparty declines to exercise the call on its expiry date (i.e. the spot market price of gold is below the calls strike price) the calls expire unused with no additional financial impact.

In the third quarter of 2005, we bought an additional 90,000 puts and at the same time sold 90,000 calls. The strike prices of the calls and the puts were set so that the revenue on the sale of the calls exactly offsets the cost of the puts, and thus no cash was required for the transactions. The strike price of the puts was set at $400 per ounce and the calls at $525 per ounce. At the time that these puts and calls were acquired the spot price of gold was between $424 and $440 per ounce.

Puts acquired in the second quarter of 2005 and outstanding at December 31, 2005 expire as follows: 90,000 in 2006 and 22,500 in 2007. Puts and calls acquired in the third quarter of 2005 expire at a rate of 5,000 per month between October 2005 and March 2007. In December 2005 we repurchased calls on 15,000 ounces at an average price of $4.13 per covered ounce. The repurchased calls were for December 2005 and January and February 2006.

Derivative accounting rules require that at the end of each period, the remaining unexpired puts and calls be revalued to their mark-to-market fair value (the price at which we could sell the puts or the price at which we could buy back the call options). The initial mark-to-market value of the puts was equal to the price we paid for them. The mark-to-market values at December 31, 2005 decreased because gold prices rose after we bought the puts thereby making it less likely that the floor price established by the puts would provide a future benefit. The $0.9 million decrease in the mark-to-market value of the puts as of December 31, 2005, has been recorded in our Consolidated Statement of Operations. The remaining fair value of the puts at December 31, 2005 was $0.1 million.

If the gold price were to fall in the future, the mark-to-market value of the puts would increase since it would be more likely that the floor price mechanism in the puts would provide an economic benefit. In such a case we would recognize a gain equal to the increase in the mark-to-market value of the puts.

The value of the call options is also marked to market each period in a manner similar to the put options. The only difference is that the mark-to-market value would be based on the price we would have to pay to the counter party to buy back the call options. As gold prices increase, the value of calls increase. The fair value of calls (the price we would have to pay to buy back the calls) was $2.3 million as of December 31, 2005 and we recognized a non-cash expense of this amount in our Consolidated Statement of Operations for the increase in the buy-back cost. It is noted that the mark-to-market fair value will be brought back into revenue in the statement of operations over the next 15 months.