Australians seize golden opportunity
22 Feb 2000 09:40GMT
The recent move by some North American and South African gold producers to push the gold market higher by announcing curbs on forward selling has been welcomed by Australian gold producers.
But rather than joining their foreign gold-producing cousins in sales restraint, Australian gold producers are using the rally in the gold price to extend, rather than reduce, their forward sales positions.
The gold price in Australian dollars is at very attractive levels. It traded above A$500 (US$315) per ounce recently on the spot market, and the 12 months forward price has been over A$520/oz. At these levels Australian producers cannot afford not to sell, say analysts.
"Over the past week we have seen very strong selling interest from the [Australian] producer side. They are not following their North American brethren," says Simon Klimt, product head of commodities with Wetspac Banking Corporation in Sydney.
Canadian producers Placer Dome Inc and Barrick Gold, along with the South African producer AngloGold, said earlier this month that they had reduced forward sales (hedge) positions or intended to hedge less.
The North American and South African announcements pushed the spot gold price up through US$320/oz earlier this month.
With the Australian dollar simultaneously dipping below 63 US cents, this resulted in an Australian gold price of around A$500/ oz, the highest spot price for six months.
But the forward premium for the 12 months' gold price, called the contango, also increased to around 5 per cent or about A$20/oz. (Six months ago the contango was minuscule because of soaring lease rates.)
This pushed the 12 months' Australian dollar gold price to its highest level for four years and opened the window for fresh Australian producer forward selling.
The Australian dollar spot gold price has drifted back from those levels over the past few days' trading, perhaps partly because of producer selling, and is currently trading at around A$480/oz. However, analysts suspect there is more producer selling to be done if the gold market rallies back towards A$500/oz.
"Traditionally A$500/oz is a level producers like to sell at," said Mike Chester, gold analyst in Melbourne with Salomon Smith Barney. And why not? According to Salomon Smith Barney, Australian gold producer average cash costs of production in the December quarter were only A$316/oz.
"We [think] any move towards A$500/oz will trigger some Australian producers to act," says Ric Simes, chief economist with bullion dealers Rothschild Australia.
Already the forward sales and options positions of Australian producers are at record levels and they "continue to steadily increase", said Mr Chester.
At the end of September, Australian gold producers had hedged a record 1,477 tonnes and since then it has increased further, said Mr Chester. This is equal to five years of Australia's gold production.
The average price of the Australian industry's hedge position as at the end of September was A$565/oz. This has fallen from an average industry hedge price of A$660/oz in 1996, as positions were added into the falling gold market.
It is not just a matter of locking in attractive forward prices. As debt levels in the Australian gold sector have exploded over the past five years, gold producers need to forward-sell for the comfort of banks and for prudence, said Mr Chester.
The significant increase in debt levels relates to project development and corporate acquisitions. At the same time, as equity capital became increasingly difficult to raise - a total reversal for the gold mining industry, once the hub of speculative investing - gold producers had to turn increasingly to the debt markets.
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