Tuesday, May 28, 2013

"DERIVATIVES: Gold fall spurs hedging re-think"

When the news hit* that Petropavlovsk was going to hedge over half its Q2 2014 production I focused* on the ephemera of Petropavlovsk's Chairman Peter Hambro selling forward a chunk of production at the same time his son was very publicly buying for a couple of the funds he runs for BlackRock.

The hedging story might end up being quite a bit bigger than just a tale of the old man going contrary to the kid.
Front futures $1381.80 down $4.80.  
From International Financing Review-Asia:
The recent sharp drop in the price of gold may encourage miners that are feeling the squeeze on their margin production costs to undertake a dramatic u-turn and open up hedge books once again, although bank overtures are likely to meet stern resistance from clients after years of shunning hedging programmes.
Gold miners paid up billions of dollars over the past decade in order to eliminate hedge books, which were acting as a significant drag on profits as the gold spot price trended upwards.

A 15% fall in less than a week in mid-April seems to have removed some of gold’s sheen in the eyes of investors, though, and has sparked a debate among the smaller mining companies about whether hedges need to be implemented in order to avoid future losses, particularly if spot prices were to lurch lower once more.

“We think producers are under pressure to put on hedging, with a very steep cost curve and high production costs,” says Robin Bhar, head of metals research at Societe Generale. “The problem is it needs a cultural change at the board level after a decade of de-hedging. But shareholders can’t always have it both ways in terms of exposure to the gold price and a profitable company.”

Reluctance at board level to hedge falling gold prices is perhaps understandable. As spot prices steadily climbed from a base level of around US$250 in 2000, miners decided to unwind vast hedge portfolios that often involved selling away upside profits.

This sense of urgency was further fuelled by gold shooting up from US$640 in August 2007 to a peak of US$1,900 four years later, as the combination of the financial crisis and unprecedented central bank monetary expansion saw investors flock to the metal as a safe haven....MORE
*Too Funny: "Risk of vicious circle for gold as hedging returns" (Petropavlovsk sells forward 55% of Q2 2014 production)
The Feb. 15 announcement was at $1663. Total hedge is now 15 of the 21 tonnes expected production.