Gold hedges lose some shine as bullion price rises

GOLD mining companies have reduced their hedge books and were willing to sell more of their commodity at market prices as bullion prices creep higher, industry executives said on Monday.

Gold has see-sawed either side of $300 an ounce since February after averaging $273 in 2001, underpinned, gold analysts say, by Middle East tensions and uncertainties in stocks and banks.

This has made hedging, or guaranteeing revenue by selling future production at fixed prices, less attractive.

However, suggestions that hedging future production at fixed prices to cash in on rising bullion is on the way out are greatly exaggerated, the Australian gold conference of mining companies was told on Monday.

“We are not getting any criticism from our larger shareholders on our approach, it is very strongly accepted,” Rex McLennan, chief financial officer of Canada’s Placer Dome said.

“Our hedge book has a market-to-market value year end of nearly $490 million, in fact it is positive up to a price of $345 an ounce,” McLennan said.

IN THE MONEY

Gold prices haven’t reached $345 since 1997.

Still, Placer will reduce its gold hedges to under 50%, McLennan said.

“In the next couple of years we will meet commitments that are 40 to 50% for the next year or so and then they decline after that, so if you average them out we’re in the 30 and 40% range,” he said.

Barrick Gold plans to sell half its output of 5,7-million tons this year at a minimum price of $365 an ounce, leaving the rest to sell at prevailing market prices, Barrick president Randall Oliphant said.

Last year, Barrick had pre-sold its entire output at a minimum of $340 an ounce.

“That extra gold exposure to gold prices means that for every $25 increase in the gold price we will see earnings and cashflow increase by 70-million this year alone,” Oliphant said.

“Hedging is not a dirty word and still has a major role to play in the gold sector and particularly in new projects,” said JP Morgan senior gold analyst Geoff Been.

But even one of the industry’s most active hedging company’s, South Africa’s AngloGold, is chipping away at its hedges.

It said last week it was “aggressively” running down its hedge book because of market conditions and a strong bullion price.

In Australia, hedging continues to fall out of favour, dropping nearly eight percent in the December quarter as mining houses speculated on an upturn in world prices.

The reduction to 34,2-million ounces from 36,5-million took in a wide swathe of the industry and was led by three of Australia’s biggest mining houses—Aurion Gold, Newcrest Mining and WMC—and the former Normandy Mining.

Hedging has been criticised by industry behemoths such as Newmont Mining Corp and South Africa’s Harmony Gold, avowed non-hedgers, for long restricting bullion’s upside by effectively erecting a price ceiling.

Newmont has promised to close out some eight million ounces of hedges inherited with its takeover of Australia’s Normandy Mining earlier this year to give shareholders full exposure to market gold prices.

Supporters of hedging say the practice limits risk if gold prices tumble, and guarantees revenue streams.

“We view hedging as a key risk process,” said Placer’s McLennan. - Reuters

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