Hedging not all bad for gold miners in 2013
Hedging remains subdued, despite big profits by early movers and an increase in inquires that could see more companies taking up the practice in 2014.
LONDON (Mineweb) -And a link to another terrific piece, this time at FT Alphaville:
Despite aggressive downward lurches in the gold price in recent years, gold miners remain reluctant to hedge their gold production,
The majority of new hedge books opened since gold's nominal peak in 2011 have been imposed by lenders or motivated by tactical cash flow concerns. London-listed Shanta Gold and Australia's Evolution Mining have both used hedging this year, but only as a 'last-dollar' funding technique, used to bring new mines into production, with the majority of their output remaining unhedged.
ASX-listed Beadell Resources is sitting on one of the industry's most valuable open books, selling 60 per cent of its output at $1,600 per ounce, but the forward sale was imposed on the company by its lenders Macquarie Bank.
Gold miners voluntarily entering hedging programmes remain mavericks, despite having profited handsomely. In the face of a cumbersome cap-ex pipeline at its operations in Russia, London-listed Petropavlovsk has hedged 14 tonnes of gold this year, raising $799m, equal to an average price per ounce nearly $400 higher than the current spot price. China-backed Norton Gold Fields also began hedging this year, selling 50,000 gold ounces at $1,400 per ounce.
Companies have more commonly responded to price weakness by closing existing books, capitalising on the opportunity to become unhedged. After gold's biggest one-day drop in 30-years in April, Crocodile Gold, Reed Resources and Mutiny Gold all profitably closed out agreements, in each case using the proceeds to pay down debt.
Hedging is an emotive issue in the gold mining industry, with shareholders wary of a strategy that both reduces gold exposure and increases operational risk. With many commentators likening gold's recent decline to its drop in the mid-1970s, which was followed by an eightfold increase in prices by 1980, mining companies entering large forward sales also risk being criticised for selling their future production at the worst point in the cycle.
Investment bank Société Générale recently told clients that miners were “queueing [up] to bullion banks to discuss short-term hedging arrangements,” suggesting that tactical hedges could collectively become a large industry movement. Barrick Gold's chairman John Thornton, former co-chief executive of Goldman Sachs, has meanwhile said he believes hedging makes “great sense.”
“I can’t understand for the life of me why that wouldn’t be an active topic that you would be carefully following at all times,” Thornton has said. Only four years ago, Barrick raised over $5bn, heavily diluting shareholders to unwind its hedging programme....MUCH MORE
Gold Miners: A Fool And His Money (GDX; GDXJ; GLD)
