LAWRIE WILLIAMS: Gold hedging increased in Q1. Positive or negative?
While some, for the most part smaller, gold miners always continued hedging a part of their gold production forwards to tie-in revenue – particularly in Australia, and some other countries, where the fall in the value of the Australian dollar against its U.S. counterpart meant the local gold price never really dropped substantially during the 2011-2015 U.S. dollar gold price downturn – hedging (committing forward) all or part of a mine’s production had largely fallen out of fashion. This was largely due to the major gold miners seeing what were effectively large book losses from such forward sales over the years when the gold price was rising fast and they consequently put considerable effort, and money, into unwinding their hedgebooks and there followed a consequent substantial period of dehedging.
Arguably the miners got their timings wrong, at least in part, with the gold price downturn (in U.S. dollars at least), when continued hedging might have saved them from a sharp fall in revenues and profits along with the declining gold price. And now, it would appear from the latest data published by precious metals consultancy GFMS, in conjunction with SocGen, that some gold miners could be getting their hedgebook policies wrong again in a return to hedging activity, locking in current prices just when the gold price has been rising again.
GFMS thus notes that during the first quarter of 2016, the producer hedge book expanded by 1.62 million ounces (50 tonnes) and thus the global hedge book total stood at a delta-adjusted 8.69 million ounces (270 tonnes) at the end of Q1.
GFMS goes on to note that the majority of the net hedging during the first quarter came from Australia’s biggest gold mining company, Newcrest, followed by a fourth tranche of hedging undertaken by Russia’s Polyus Gold. Both are located in countries where the domestic currency has fallen sharply against the U.S. dollar so the domestic gold prices secured by the hedging activity is not directly comparable with those miners located in the U.S. dollar area – notably China and the U.S itself – respectively the world’s first and fourth gold producing nations. Australia and Russia are Nos. 2 and 3.
Overall 33 companies were net hedgers during the period, while 25 companies reduced their hedge books and the marked-to-market exposure of the hedge book fell by $572 million during the quarter, totalling an unrealized asset of U.S.$34 million.
Commenting on gold hedge book activity, Dante Aranda, Mining Analyst - GFMS at Thomson Reuters, commented, “Hedging within the gold producer community saw a broader base of mining companies covering production, albeit over shorter timeframes than in 2015. With gold prices hovering near 2014 highs, the marked-to-market value of the current hedge book risks slipping into negative territory should prices continue trending higher. Nevertheless, GFMS expect that the heightened volatility and uncertainty surrounding gold prices in a number of currencies, and the apparent mellowing of investor perceptions to hedging, will lead to more producers joining the ‘hedging club’ over the remainder of 2016.”
That is an interesting assessment. With the U.S. dollar gold price having risen around 24% so far this year and a certain amount of volatility in the currency markets, there certainly will be a temptation for more producers to lock in the current gold price if operations are seen as decently profitable at current levels. The trend to hedging over shorter timeframes is also indicative of uncertainty over where the gold price is going from now – particularly as the Brexit effect starts to fall out of the forward equation. Much may depend on U.S. Fed talk regarding the possibility of raising interest rates sooner or later with any hint that this may occur sooner tending to drive the gold price downwards, while suggestions of further delays have the opposite effect. Even though the timing may not be ideal should the gold price continue upwards, limited hedging activity of this nature would seem to make some sense. This is particularly so for smaller producers bringing new mines to production where bankers may well insist on hedging at least a part of the production to tie in prospective revenue levels so financing repayments becomes a little more secure in what is considered a risky business.
12 Jul 2016 | Categories: Gold