Advance--Or Not?

By the Staff of MMC

Processors often advance metal or money against refining lots. Depending on metal market conditions these advances can be very attractive compared to bank borrowing—or not.  When markets offer low metal borrowing costs, processors often pass the benefit to their generator customers.  When metal market conditions are unfavorable, taking a processor’s advance might be more expensive than financing the metal yourself. 

Your financial capability, cash flow, and cost of money might well compare favorably to your processor’s, so it makes sense to check rates before taking an advance on the metal in your refining lot.  To estimate a Processor’s borrowing cost, look up “lease rates” on sites such as www.kitco.com or www.thebulliondesk.net.  Gold and silver are likely to have rates lower than money market interest; platinum group metals are likely to be significantly higher. Usually, the shorter the lease, the higher the lease fee.

Since the processor probably pays a premium above these quotes and marks up the rate to you, the Processor’s charge will likely be higher than the published quotes.  If not, the difference will probably be reflected in the refining terms. 

Are the processor’s rates higher than your cost of money?  If so, it makes sense to self-finance rather than to take the advance.  

If you decide to take an advance, the processor will offer a percentage of each metal in the refining lot. The amount of metal is determined by assay or by past experience.  The advance rate varies with a processor’s financial resources, the type of material and processing time.  A high-grade gold lot with few impurities might command a 95% advance; a low-grade, complex platinum group lot might get only 60%.  Processors rely mainly on the material for security but are more flexible with generators they know.

The fee on the advance will be based on lease fees for the time between the advance and final settlement.  Processors advance in metal or cash:

·      Metal: If you want metal, the processor will generally make it available at the plant.  The processor might apply a metal return charge, usually deducted in the final settlement. If the metal is made available in a pool account, there will probably be additional charges.

·      Cash:  If you want a cash advance, the processor will typically pay you basis an index, eg. the Second London Fix for gold on the day of the advance.  So, if you anticipate1000 troy ounces of gold in your refining lot, at an 80% advance rate you would be entitled to an advance of 800 troz. at a $270 gold Fix equals $216,000.  If you elect to take the balance 20% of the gold in cash, it will be priced at the time of settlement.  Note:  The price at which you fix your advance is immutable.  Whether the market at final settlement on the balance 20% is $300 or $240, the price on the advance of 800 troz. of gold stays at $270.  The fee on cash advances is based on metal lease fees.

There is a seldom-used variation on the cash advance described above:  A cash advance with the price of metal to be fixed at a future date, usually at the discretion of the refining lot generator.  Until the price is fixed, a cash advance is like a bank loan, so the fee is money-market based (eg., LIBOR or the prime rate).  This arrangement generally elicits lower advances and can be subject to margin calls if the metal price declines.