Global gold hedge book contracts to 1,241 tonnes

GFMS’s latest survey for Société Générale determined that the gold mine hedge book contracted by 128 tonnes during the first-quarter 2007, and forecasts a full year of dehedging ranging between 249 to 311 tonnes.

LONDON - 

The latest quarterly hedge book survey from Société Générale, compiled for the bank by GFMS Ltd., records that the global delta-adjusted gold mine hedge book contracted by 128 tonnes during the first quarter of this year. 

This compares with mine production of 580 tonnes, meaning that the dehedging activity reduced mine supply by 22%, taking net mine supply to 451 tonnes, compared with global demand of 827 tonnes (the balance is made up by scrap supplies and official sales plus shifts in investment holdings and inventories).

Dehedging in the June quarter is expected to be between 62 and 93 tonnes and thereafter, activity should be lower. Dehedging rates are expected to fall to approximately 31 tonnes per quarter, which would suggest full year dehedging of between 249 and 311 tonnes.

This would take the global hedge book to between 1,058 and 1,120 tonnes.  The study contains a delivery profile at the end of December 2006 and at the end of this past quarter, which suggest an increase in dehedging in 2008 and then a series of reductions thereafter.

The report describes how there has been an interesting shift in the composition of the hedge book, with forwards accounting for 60% of the total nominal hedge book, gold loans 3% and option contracts 37%.  At end-March 2006, forwards comprised 66%, gold loans 2% and options 32%.  This was due very largely to a rapid decline in forward sales through buybacks and a modest return to fresh options hedging.

The reduction in the book during the past quarter stemmed from a 98-tonne cut in forward sales and gold loans and a 30-tonne decline in the options book. Once again Barrick Gold was the chief protagonist, accounting for 62 tonnes or 45% of the total decline, followed by Gold Fields as the latter bought back the hedge associated with the South Deep mine in South Africa. 

Barrick's hedge position was reduced through deliveries of gold production. The company has subsequently stated that its remaining contract sales were eliminated in April, taking a further 16 tonnes off the book, and thus leaving the operating mines completely unhedged, while 295 tonnes of forward sales are still outstanding on a project finance basis against future operations. 

Gold Fields closed out 34 tonnes against the Western Areas delta hedge, although the physical market was affected as to just 25 tonnes, as Gold Fields had accumulated a nine tonne long position in December 2006.

AngloGold-Ashanti reported an 18-tonne decline during the quarter.  This was driven by a 23-tonne (19%) cut in forward sales while there was a modest increase in the delta hedge net options position, which would have stemmed from higher gold prices. 

The final significant hedging event was the announcement from Buenaventura on March 9^th that it had bought back 15 tonnes (25%) of its outstanding hedge positions.

These four account for 90% of the gross dehedging during the period.

There was a limited amount of fresh hedging activity, all related to project finance.  The largest came from Etruscan Resources against the future Youga gold mine. This was a collar structure comprising 14 tonnes of purchased puts, which covers 100% of the first five years' forecast production, which was funded by the issue of call options covering eight tonnes, amounting to 54% of annual output, capped at US$700/ounce. 

View Resources completed the hedge programme initiated in November 2006 with the commitment of five tonnes of forward sales. St. Barbara purchased seven tonnes of put options.

The weighted average price received for gold sales was $578/oz, roughly $72/oz lower than the average spot price over the quarter.  The shortfall in the previous three months was $52/oz, with the deterioration largely due to a drop in the received price reported by Barrick.

The report notes that, despite the rise in the spot price used to value hedge books, the marked-to-market for the comparable set of producers, where data were available, showed a modest improvement to negative US$9.7 billion.

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