Mint Sells $948 Million in Bullion Coins
By David L. Ganz
Just out is the 2008 Annual Report of the Director of the Mint, a 70-page breath of fresh air that at once pays homage to the state quarters program and simultaneously is a valedictory address of Edmund Moy, who became Mint director in 2006.
Over the past dozen or so years, the annual report read more like an advertising brochure than the annual accounting of an entity that, if found in the private sector, could qualify as number 700 in the "Fortune 1,000" listing of American corporations. It had the graphics and sizzle, but lacked substance and core information.
Moy views the 2008 report as a personal triumph, and it is. "It took me two years but I think we are now on the irreversable track of greater transparency," he said in a Jan. 30 e-mail.The report is available at the Mint Web site, www.usmint.gov.
The report affords insight into the Mint's view that it currently costs more than face value to produce a cent and also the nickel - and explains the methodology of how this accurately reflects the relative cost of producing other denominations, dime through dollar.
It does not, however, reflect what would happen if production of the cent and nickel ceased, leaving the Mint with a huge overhead of fixed costs (such as the die shop), physical plant, and heat, light and utilities. The effect is to make the dime cost more than face value to produce - because the method used is capitation - one coin, one vote.
Circulation coinage was down 25 percent last year (from $1.7 billion face value in 2007 to $1.2 billion in 2008, and it is probably no great surprise that numismatic sales of circulating coins was also down by 18 percent.
Still, the numismatic sale of circulating coins amounted to $29.6 million - down from 2004 at the height of the state quarters program when $62.1 million in sales was racked up. The Mint's numismatic program increased by about 2.4 percent over last year with $527 million in gross sales. In 2007, it was $515.4 million - and five years ago in 2004 it weighed in at a mere $279 million.
Higher returns and profit were possible, but the report states the Mint's mandate: "Our mandate for numismatic coin sales is not to maximize profit but to recover costs and keep prices as low as practicable so that Americans can afford them."
The bullion program brought in a whopping $948 million in revenue and net income of $17.8 million - but protecting that profit was a hedge purchase, revealed for the first time in the Mint report. The bullion program's aim is also revealed: "By law, the purpose of the bullion coin program is to make precious metal coins available at minimal cost to investors, so we manage to a 2 percent margin."
Actually, the Mint missed the margin slightly, since the net income on $948.8 million in sales would be $18.9 million; still, a $17.8 million profit is credible. It also acknowledged supply problems with gold and silver in 2008.
"In FY 2008, we produced more ounces of precious metal bullion coins than any prior year, a feat that we are proud of. However, we could not procure enough planchets to meet demand. We were forced to temporarily suspend sales and established allocation programs to equitably distribute available inventory to authorized purchasers."
But that profit was achieved artificially, the report reveals: "In addition, as of Sept.30, 2008 ... the inventory includes $32.0 million ... in fair value silver hedge activity."
This is amplified later in the report.
"Each sale to and from the purchaser carries a small transaction fee, the selling and buying fees net to a cost of one-half cent per ounce," the report says. For $14 an ounce silver, that is modest.
The Mint incurred $90,000 in hedging fees in FY 2008, compared to $43,000 incurred in fiscal year 2007. At Sept. 30, 2008, hedging activity of $32.0 million represents the value of the silver sold to the Mint's trading partner and not yet sold by the Mint. In fiscal 2008, the Mint recorded an unrealized gain from hedging activity of $932,000.
Moy's report is candid in assessing the difficulties of the Mint: "Weaknesses include inadequate accountability, a risk-averse culture and a lack of coordination and trust."
Another conundrum at the mint is the long lead time needed to change coin composition to meet market realities. In the 1960s, for example, it took oer four years to change to copper-nickel cladding. The Mint reauthorizaition act of 1973 ultimately was not considered until 1981.
"Base metal prices continue to fluctuate. If prices continue to climb, there may be further erosion of seigniorage per dollar issued on circulating coins. We are optimistic that Congress will pass legislation enabling the United States Mint to more aggressively address the composition and cost of our circulating coins, but implementation will take time. Should legislation pass, we predict that the first positive effects of any content change will occur in FY 2010," the report says.
The Mint's course of action shifted under Moy. Last year, the Mint "created a Brand Identity Steering Committee... to develop and establish a United States Mint branding strategy. The objective of this effort is to establish and reinforce the exclusive brand identity of the United States Mint."
Some of the key components of this objective are to increaaase the public's recognition of the Mint as the exclusive origin of United States coins and medals. They want as well to reinforce individuality, and official authority of "United States Mint marks, names, symbols, and trade dress," terms familiar to intellectual property attorneys but foreign to the mint.
The Mint had two other key goals.
"Diminishing the public's likelihood of confusion and mistake between the United States Mint and other sources of coins and medallions, such as private mints and dealers; and Promoting the reputation, goodwill, confidence and quality associated with the United States Mint name and marks."
The Mint is also committed to excellence in coin design, its report says. "Coins are one of the most visible, tangible representations of a country. Thus, we believe our products are exceptional artistic media for expressing our national character, memorializing our past, and embodying our future"
New technology for the Mint in its production regime was also effected last year, the report says. "The resulting new digital process employs computer software tools to generate two- and three-dimensional designs on virtual paper and clay. Designs are digitally scanned, reviewed and revised electronically."
This brings about a significant operational change: "Once obverse and reverse designs are perfected, a Computer Numerically Controlled machine uses digitally controlled lasers to accurately reproduce the design on a single or multiple hubs. This digital process has reduced the time required to manufacture a hub from two to three days to under 24 hours."
