Strike Against Gold Hedging
NEM merger seen as strike against gold hedging practiceKaren Howlett00:00 EST
Thursday, November 15, 2001Newmont Mining Corp.'s proposal to create the world's
largest gold producer will add a powerful voice to the growing chorus of critics opposed
to hedging, industry observers say.During a conference call with analysts yesterday to
discuss its planned merger with Australia's Normandy Mining Corp. and Canada's
Franco-Nevada Mining Corp., Newmont executives said the combined entity will have a
non-hedging philosophy.Pierre Lassonde, co-founder of Franco-Nevada and
president-in-waiting of the merged company, also pledged to eliminate Newmont and
Normandy's combined hedge positions if the merger succeeds.
"You all know [Franco-Nevada co-founder Seymour Schulich] and I have shared a
philosophy of non-hedging for 18 years," Mr. Lassonde said. "We're . . . delighted to
merge with a company like Newmont that has the same philosophy."Mining analysts
described the non-hedging strategy as one of the most important aspects of the deal,
one that is sure to heat up the battle with the hedgers."It's building a world of hedgers
and a world of non-hedgers," said John Ing, president of Maison Placements Inc.
Murray Pollitt, president of Toronto investment firm Pollitt & Co. Inc., said Newmont
will have the "financial clout and the moral clout to hammer home the point that hedging
has been an inappropriate exercise."Hedging basically involves preselling gold at a set
price before it is actually produced. Banks like entering into hedging contracts with
mining companies because they earn revenue on the gold held in their vaults. And some
mining companies like hedging because it effectively allows them to earn interest on
unmined gold in the ground and escape depressed bullion prices.Barrick Gold Corp.,
which pioneered the practice, says its hedging strategies have generated more than
$1.5-billion (U.S.) of extra profit and an additional $68 an ounce above the spot price of
gold over the past 14 years."We'd rather put $68 in the bank than bank on the price of
gold going up," said company spokesman Vince Borg.But critics say hedging is a major
culprit behind the depressed price of gold because producers borrow gold from banks
and sell it in the open market, thus increasing supply. Gold closed at $277.80 an ounce
yesterday.Franco-Nevada's Mr. Lassonde described hedging during the conference call
as the "bane of the industry for the past 10 years." But he said speculative hedging
activities are declining because low interest rates along with higher gold lease rates (the
rates banks charge for lending their gold) make it less profitable.He also said he is
confident that gold prices will rise about $20 an ounce over the next three years as
supply falls and demand rises."If you don't believe gold is going up, I don't believe you
should own any gold," Mr. Schulich added.Kerry Smith, mining analyst at Haywood
Securities Inc. in Toronto, said Newmont's commitment to become an unhedged
producer has big implications for the mining business in general and is bullish for the
price of gold.He said Newmont has three million ounces of gold hedged, while
Normandy has 11 million ounces, adding up to about two years of production.
Analysts also don't like hedging because they say mining companies should stick to what
they're good at -- producing gold. |
