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.
“History shows us that many producers’ hedging activities have not been ideally timed to make the most of market moves,” says William Tankard, who compiles hedging data for Thomson Reuters GFMS.
Barrick’s decision in 2009 helped squeeze gold through $1,000 per ounce for the first time, demonstrating the impact hedging strategies can have on the spot price. Whilst the unwinding of hedges supported gold’s most recent bull market, any rise in hedging could act as a self-fulfilling dampener on prices, with miners flattening each rally by selling ounces into strengthening markets. In September, after a two-month gold price rally Evolution Mining opened its current book by selling 156,000 ounces.
According to Tankard, banking counterparties are reporting a ramp up in the number of enquiries relating to hedging. “We think it has the potential to bring about meaningful volumes of hedging,” he says. “Whether we’re on the cusp of that just yet or not remains to be seen.”
Who’s in the Money?
As gold prices have tumbled in 2013, industry lenders are reporting a tentative increase in hedging by miners, the process of selling gold forward to lock-in guaranteed cash flow. Mineweb looks at which companies are “in the money” on their hedging programmes, selling their output well above the spot price.
ASX-listed Beadell Resources is firmly in the money on a three-pronged hedging strategy foisted on the company by its lenders, Macquarie Bank. Under its lending terms, Beadell sold forward 150,100 ounces at $1,600 per ounce, also taking on two tranches of call options over 70,000 ounces at up to $1,700 per ounce, the profit on which increases the further prices fall.
Beadell has accelerated deliveries into its hedging book as prices have dropped and as output from its Tucano gold mine in Brazil has trumped expectations; selling 60 per cent of output at $1,600 per ounce, Beadell’s managing director Peter Bowler expects to be hedge and debt free within the next 12 months.
In February, London-listed Petropavlovsk sold forward 399,000 gold ounces at $1,663, adding a further 96,000 ounces to its hedging programme in May at $1,408. The total forward sale amounts to a 14-tonne hedge, or roughly 50 per cent of projected production until June 2014, allowing chairman Peter Hambro to “sleep better at night.”
In September, ASX-listed Evolution Mining sold forward an eye-catching 85% of output from its Edna May gold mine near Perth until 2016. 156,000 ounces were sold at A$1,598 ($1,435). Evolution views the hedge as one-off solution to cap-ex requirements at Edna May, with 80 per cent of its overall output remaining unhedged. “The company does not anticipate putting in place any further hedging,” said chairman Jake Klein.
West Africa’s Perseus Mining carries 147,000 ounces in hedged production, deliverable quarterly until December 2015 at average prices of $1,432. In its September filing, Perseus said the book was “in the money to the extent of $14.4m”, but as gold has pulled back, that figure ought to have swelled to nearer $30m. Perseus produced 46,000 gold ounces in its last quarter.
Norton Gold Fields, listed in Australia but controlled by Chinese gold miner Zijin Mining, has sold forward 50,000 gold ounces at A$1,601 ($1,400) per ounce, equal to a third of its current year output. The agreement was struck in August at a $9 discount to the spot price, but with gold closing on Friday at $1,236, the company has improved revenue by a nominal $8.2m.
AIM-listed Shanta Gold sold forward 30,000 gold ounces at $1,429 in April this year, but only after gold’s steepest drop in 30 years. “Shanta in principle does not favour hedging,” said chief executive Mike Houston. The move guaranteed cash flow for projected spending commitments however, as Shanta ramps up its New Luika mine, Tanzania.
New Luika is projected to produce 430,000 ounces per annum and with gold trading at $1,236 per ounce, Shanta’s book is up by $5.8m.
Late to the party, B2Gold has been less public in its hedged production, imposed under the terms of a senior credit facility. The company is carrying a so-called “put-call collar”, the process of selling call options to pay for put options, restricting the price on part of its production to between $1,721 and $1,000 per ounce.
Data published by Thomson Reuters GFMS suggests B2Gold’s hedging book is comparable in size to Petropavlovsk’s and whilst the collar is wide, so is its expiry term: options are due to settle between January 2015 and December 2018. However, it is important to note, Tankard explains that there is another difference between B2Gold’s hedge book, which is comprised of option hedges, and Petropavlovsk’s which are forward positions. While the two positions are similar in nominal volume terms, because options are subject to option delta, [in other words the value of the underlying asset does not move in a one-to-one ratio with the price of the derivative] Tankard says, the underlying volume of gold hedged in B2Gold’s case will be appreciably lower than Petropavlovsk.
Books Closed Profitably in 2013
Crocodile Gold has been a standout beneficiary of hedging this year. Through a string of swaps connected to borrowing terms, the company had sold forward to Credit Suisse 8,000 gold ounces per month at A$1,540. Snapping at gold’s collapse, Crocodile unwound the agreement in April, raising A$58m and paying off the bulk of its debt.
Reed Resources and Mutiny Gold also moved quickly in April, unwinding 110,000 ounces and 50,000 ounces respectively. Reed booked profits of $27m from its dalliance into the derivatives market, with Mutiny earning $11m. Both companies used the profit to pay off debt to Credit Suisse.
iPad Version: Picture – Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh: REUTERS/Ajay Verma