Here's one Mgt might enjoy :-)
10p EST Tuesday, November 29, 1999
Dear Friend of GATA and Gold:
Brett Kebble of JCI Gold in South Africa has written
what may be the best policy statement on hedging that
I've seen.
It was published this week at www.moneyweb.co.za and
it follows.
Please post this as seems useful.
CHRIS POWELL, Secretary
Gold Anti-Trust Action Committee Inc.
* * *
WHY WE'VE NEVER HEDGED FOR REVENUE
By Brett Kebble
JCI Gold, South Africa
moneyweb.co.za
When you examine the industry of gold, you have to view
it as a business or you shouldn't be in it.
If one's mining assets don't require any capital and
one has a shareholder base totally driven by people
looking for call options on the gold price, I think you
have a pretty hard time trying to change the nature of
the business. In fact, one can't really change the
business: You are a gold exposure and you've got to
live and die by what happens to the gold price. That is
a very opportunistic approach and you can either do
very well or do extremely badly.
I have the view that hedging gold for revenue-enhancing
purposes is the wrong thing to do. We've never done
that at JCI Gold. In this group, any hedging that was
done was to provide downside protection for capital
projects, and we fixed our lease rates.
This is proof that we have viewed hedging as a very
useful tool to protect the downside where you've got
capital projects, or where closure of infrastructure at
certain gold price levels would be very costly. This
was the approach with the Western Areas joint venture
project of which Western Areas owns 50 percent.
The Western Areas joint venture (with Placer Dome) is a
great gold growth project. We had to adapt our thinking
to the development of project. We asked the question:
How are we going benefit the shareholders over the long
term rather than let them take the risk? What is the
difference between Western Areas currently hedged at
$330 and being unhedged at $300?
One has got to be very balanced about that.
I still firmly believe that revenue-enhancing hedging
is just as bad as hedge fund activity, and producers
that ran around bragging about the value of their hedge
books deserved to be swept off in obscurity.
Ashanti was a good case in point: bragging about the
value of the hedge book is a dangerous thing, because
all you are doing is highlighting a part of the
business that is there to protect you against risk
rather than giving you a value on your balance sheet.
To me being overhedged is just as bad as being unhedged
in circumstances where you ultimately have a
responsibility not only to shareholders but also, for
instance, to labor. What happens to gold producers who
have a cost of about $250/oz but then gold goes down to
$220/oz? They've got to close the mine and might have
to lay off 10,000 or 20,000 people. To me, when the
gold price got to those levels (around $255/oz or
lower), it became increasingly important to make sure
we weren't put in that position.
I had a firm view that lease rates would eventually
turn, but I must tell you something: I'd rather have
been safe than sorry. We did unwind certain of our
hedges at $255; we felt that this was the time to start
doing it, and we did sell on the basis of knowing that
we would be quite happy in a gold bull market for a
quarter to a third of our gold production sold forward.
In the case of Western Areas, it has a quarter of
production sold forward or slightly less. Randfontein
is about a third. That's nothing.
And what do I want? Of course I want a $400/oz gold
price because two-thirds of my production is exposed to
the upside.
The entire hedging debate has become polarized because
of the lack of understanding. There are no absolute
rights and wrongs. In fact, one has to be very measured
in the way one handles the risk issues.
The future of the gold price hinges on the lease rates.
In the recent past we have seen the decimation in
short-term lease rates from levels of 6-7 percent. But
what is odd is that the longer months, going up to two
months, have increased to 2-3 percent. So we have a
strange lease rate curve at the moment indicating that
the short end is going to come up with the long dates
coming down.
My own view is that the banks were very taken aback at
the sudden move in the gold price recently and the
calamity it caused, particularly with companies like
Ashanti and Cambior. The banks saw the enormous stress
developing particularly among the commercial banking
sector. As a result, they have decided to play a role
in providing short-term liquidity. Once they see
stability, they will tighten the gold supply. From a
technical point of view, the market is looking for a
bounce in the gold price from here.
As for the recent spike in lease rates to 8 percent, I
don't think that is a sustainable number. Ultimately it
is a question of the level at which central banks feel
they can lend gold and attain an equilibrium price of
gold. This must mean that prevent the speculators from
doing a traditional carry trade, the lease rates have
got to be around where dollar deposit rates are. If
your lease rates are at dollar deposit rates, then
nobody makes money out of hedging. It is effectively a
neutral cost to provide downside protection if you need
it or want it. That will take you to a new equilibrium
price of gold.
I don't know what that price is, but it is certainly
not $255 and hopefully it is going to be higher than
$300/oz. About $350/oz is a number I would view as not
impossible.
The danger with the recent gold price recovery is that
people just got carried away. They went a bit wild and
expected the price to go through the roof. But the fact
of the matter is that anybody concerned with sharp
movements in the gold price will meet it on the way
down, and a lot of other people on the way up. That's
probably why central banks decided to climb back in and
provide that stability.
Another influence on the gold price, before the end of
the year, is the third United Kingdom gold auction. But
the U.K. Treasury has said it was going to retain the
right to sell gold between auctions. I wouldn't be
surprised if the Treasury was a seller at $325/oz or
$330/oz at some point before one of the auctions.
Remember, there were some significant producer buybacks
at that level. Certainly I don't expect the Bank of
England to halt any of its upcoming auctions or lower
its sales as has been speculated in the market. In
fact, I think the bank will stick to its guns. I don't
see the bank withdrawing from the auction process.
-END- |
