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Gold producers return to hedging with vengeance
By: David McKay
Posted: 03/08/2001 10:00:00 AM | © Miningweb 1997-2001
JOHANNESBURG – South African gold producers are expected to reverse last year's trend and build their hedge positions. This is owing to the weaker dollar and stronger rand gold price, and the higher tendency to use forward gold sales to underwrite debt. The anticipated consolidation in the South African gold industry may give greater momentum to this trend.
JP Morgan estimates committed positions increased eight per cent in the last quarter to a total of 21.5 million ounces sold forward. This is equal to a discounted cash flow (dcf) value of the industry book rising to R3.7 billion from R3.3 billion in the previous quarter.
Hedging was lower in 2000 than in 1999 following the Washington Agreement, an arrangement in which some of the world's leading gold-holding central banks decided to place a moratorium on further gold sales (excluding those announced at the time).
This was followed by reductions in producer hedging, such as Harmony Gold's [JSE:HAR; NASDAQ:HGMCY] decision to close out 1.3 million ounces sold forward by Randfontein Estates. Western Areas [JSE:WAR] closed out the first two years of its book in anticipation of the sale of its 50 per cent stake in the South Deep project. AngloGold [JSE:ANG; NYSE:AU] and Durban Roodepoort Deep [JSE:DUR; NASDAQ:DROOY] also promised a reduction in their hedged positions.
"The total industry book (including all derivative positions) fell 22 per cent from 35.4 million ounces in December 1999 to 27.5 million ounces in December 2000. Continuation of this decline seems unlikely considering a weakening dollar gold price, which may prompt active hedgers such as AngloGold and Avgold to increase their books," JP Morgan's gold analyst James Wellsted says.
Hedging preserves margins
Interestingly, the average gold price received by the South African industry last year was $281 per ounce, some five per cent higher than the $269 per ounce spot price. This means the industry operating margin of 25 per cent would have fallen to 21 per cent excluding hedge revenues. In addition, the contribution made by hedge revenues to the operating margin fell to four per cent in the fourth (December) quarter of last year from nine per cent in the previous second (June) quarter.
Traditionally, the South African gold market has hedged much less than its US and Australian counterparts. For example, there was a 1.5 per cent increase in Australian producer hedging over the December quarter to 42.2 million ounces. But as the March quarter draws on, the forward market is less attractive. The retreat in interest rates is causing contangos to drop.
The mark to market value of Australian hedge book in the December quarter increased from a neutral position to A$1.1 billion after falling A$1.3 billion in the September quarter.
However, hedging by Australian producers is likely to remain high in the longer term. Analysts believe Australian companies such as Normandy Gold – which added significantly to its hedge book in the last quarter – will take opportunities to hedge as the Australian dollar fluctuates as has been the trend for the last 15 years.
In South Africa, Harmony's purchase of one million ounces in put options (to help finance its $130 million acquisition of Elandskraal from AngloGold), and additional hedging by Avgold [JSE:AVG]of up to 1.2 million ounces to finance completion of its Target gold mine continues the upward trend. Gold Fields [JSE:GFI; NASDAQ:GOLD] is the only major South African gold producer that is completely unhedged having closed out debt on Gold Fields Ghana and with it an accompanying forward position.
Reporting standards
The new IAS 39 reporting standard is requiring companies to declare the marked to market value of their hedge books in their financial statements. This compares to the previous standard which asked companies to provide profit or loss details on delivery of the position. The new standard is going to change the way investors, analysts and fund managers value gold stocks.
Derivatives classed as hedging instruments must be marked to market value at each reporting period – stating whether the hedge book is in the money or under-water – and changes in the value of the hedge offset against reserves on the balance sheet. Harmony Gold, for example, declared a positive $6 million move on its trading position.
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Gold producers return to hedging with vengeance (David McKay)
Hedging (Ed)
Morgan PR? (Bill Anderson)
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