>Hedgers wipe out more than $1-bn
By: Tim Wood
Posted: 2002/05/17 Fri 21:48 | © Miningweb 1997-2002
PRINCETON, New Jersey -- Placer Dome [PDG] is the sole remaining major hedger with a positive mark-to-market value on its hedge book, some $235 million to the good at the end of March, but that's about where the good news ends.
The combined value of hedge programmes run by the major producers, including currency and related derivative instruments, had a negative value approaching $2 billion at the end of the first quarter. The hedge programmes cover more than 70 million ounces of gold; equivalent to nearly a full year of new mine production.
The losses piled on as gold ran up from the December 31 closing price of $277 an ounce to the first quarter closing of $303 per ounce, a $26 gain, or 9.4 per cent. With bullion since adding a further $7 and holding at these levels through the second quarter's midway point, things are looking bleak.
The books of the largest hedgers swung violently as the leading foursome by ounces committed – Barrick [ABX], AngloGold [AU], Placer Dome and Newmont [NEM] – saw their balance sheets weaken by close on $1 billion. The top four account for over 50 million ounces of hedge commitments, half of those against Barrick's name alone.
Australia's Newcrest [NCR] is in a precarious position at nearly half a million dollars in the red on all its positions against just 6 million ounces committed, or a little more than one fifth of resources. Fellow Aussie producer Aurion Gold also looks endangered with 90 per cent of its reserves short sold, a programme that is underwater to the tune of $250 million. That is more than double the loss Ashanti [ASL] carries on 9 per cent fewer ounces.
Newmont
Newmont has been fighting to buttress investor perception of it as a champion of the anti-hedging movement, but as the fourth biggest hedger with 7.3 million short-sold ounces acquired from Normandy, the "leveraged-to-gold" mantle falls squarely on Gold Fields [GOLD], at least for the time being.
Newmont's successful and very fully priced bid for Normandy was predicated on a rising gold price, but if truth be told, it ran a little early. There is no question that if the mark-to-market value had been positive when the deal was closed in mid February, Newmont would have closed out every ounce.
Newmont treasury representative Randy Engel says the company has to deal with the hedge book "opportunistically". He says there were no undue surprises on assuming responsibility for the hedges, but there is little point spending most of its cash reserves to escape the noose. That may partly explain why Newmont has failed to achieve the widely expected rerating on its debt after it was cut BAA3 by Moody's a year ago.
Intriguingly, Engel says the net negative value of $411, which covers all instruments, represents a full and final settlement figure. It has been widely assumed by hedging critics that early close outs would invite severe penalties.
A Toronto mining executive was surprised at the claim, saying that his personal experience with hedge contracts was that it was almost impossible to wriggle out of them except at huge additional cost.
Newmont executives would never say so, but It would actually suit the company to have gold dive briefly back to $277 per ounce, which would put its hedges back in the black and make it worthwhile to close out.
Meanwhile, Engel says the firm is committed to managing its positions actively to ensure the fastest possible reduction in committed ounces at the least cost. "We won't be doing wholesale maintenance on it on a day-to-day basis," he says.
That may be a weakness says another mining executive who thinks Newmont's lack of hard core hedging experience is being shown up in its lack of flexibility relative to other producers.
Rogue magician
For as long as Newmont is within the hedging camp, it has the potential to wreak the sort of havoc a rogue magician does by revealing trade secrets. Houdini was only as appealing as the mystery of his exploits.
Until now, all producers have hardly pushed disclosure limits when talking about their hedging programmes. They cite competitor concerns and contractual secrecy demanded by their banks as reasons not to provide the sort of information investors could use to do independent modelling.
Indeed, it is impossible to find a single equity analyst or portfolio manager who can claim to have any of the hedge books nailed down beyond extremely rough sensitivity charts. It is not a trivial concern give the tremendous contribution hedging has made to the bottom line in the down cycle. The reverse will be true the longer the boom persists and the hedgers risk chaffing against the swing to full disclosure given all the accounting scandals.
Consequently, Newmont's semi mischievous revelation in its primary news release of how producers burnish prices received on hedged ounces is a welcome start to unravelling the black boxes. Quite how far it will be able to go remains to be seen, but it has set a new reporting benchmark for its peers.
Investors should be demanding identical disclosure across the board in terms of understanding the net price achieved on hedged ounces where producers have borrowed gold and, therefore, incurred costs against floating rate instruments, in order to generate cash flow.
Accounting guidelines require only contractual prices to be disclosed so producers can continue presenting headline figures as they do and burying the detail in footnotes. The easiest thing to do would be to follow the old Normandy practice of revealing the average life borrowing costs in simple percentage terms.
Investors on the gold bug side of the fence will be hoping against hope that Newmont reveals as much as possible about its hedging model if only to allow someone to break the cipher on many others.
Company Mark-to-market Committed oz
Barrick -$127m 24moz
AngloGold -$495m 12.9moz
Placer Dome +$235m 8.6moz
Newmont -$411m 7.3moz
Newcrest -$492m 6moz
Aurion Gold -$247m 5.5moz
Ashanti -$106m 5.1moz
Lihir 2.5moz
Cambior -$29.8m 1.2moz
Comment on this story >
Hedgers wipe out more than $1-bn (Tim Wood)
. . More transparency (Greg Utas)
. . . . Need to add gold lease rates and LIBOR (Reeper)
. . Well Done - Newmont Will Close Out - Others Barrick - Fancy Foot Work NEVER TRUST? (John H. Mesrobian Esq.)
. . (Jerry)
. . . . Reply to Jerry (Tim Wood)
. . TIM WOOD, from my Cafe commentary (Bill Murphy)
. . Nothing New Here (Black Blade)
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