Your problem is, you refuse to think like a producer,...you want only to think like a speculator. The hedged producers are not speculating on the price of gold, they are locking in a price for a certain portion of their annual production and reserves. They have the gold in the ground, and they will pay to their hedges with gold eventually if called. I emphasize again,...they eventually will pay the option or lease off with gold they have produced, not with cash, so your example does not apply.
Thinking like a producer, you write your call options at a strike price above the current spot price, say $30, and collect your premium. Odds are over the last 20 years, you rarely get called, so you collect a premium for free, and continue to write calls and collect further premiums. If the POG spikes up and holds above the strike price plus premium until the exercise date,...you can deliver your production directly into the option, or lease gold from a bullion bank to deliver the gold. You do not pay in cash,...you only pay in gold. Alternatively you may buy gold using cash,...but with the large debt that NGX has collecting interest, they would rather use cash to pay down the debt, saving them the interest costs, and improving their balance sheet.
So simply,... if gold continues to go down for years and years like it has for the last 20, you keep writing out of the money calls, and collecting premiums, and the call options expire. If gold spikes up, you deliver into the option with gold you mined,...you have lost nothing, but you did get the premium and delivered gold into the option at a higher price than the spot was when you wrote it,...that is a producers hedge! You get a predetermined price for your gold production.
As a producer, you know you can produce the gold at a cost of say $200 per oz,...so any way you can get more than the current spot by selling an out of the money call and collecting a premium per oz to boot, puts you ahead of the spot price at the time you wrote the calls, and makes you a profit.
There is no way you lose money, unless the bullion banks stop lending you gold, which would force you to buy gold with cash. They fully intend to deliver to any called options of lease rollovers with gold production. They are addressing the problem of short term writing of option hedges, by rolling them into longer term forward leasing contracts and spreading out the delivery dates over many years. That way only a small portion of their production in any year will need to be delivered to the expiring leases, and they will book the gold as sold at whatever the strike price of the option was at the time they rolled over the contract into the lease, which may be more or less than the current spot but who cares if the revenue was greater than the cost to produce the oz of gold. It's the old saying,..."a bird in the hand, is worth two in the bush",...that's the way a good manager must think to lower risks, and make a profit.
With less than a million oz of Au hedged, almost 9 million oz Au resources will end up getting the spot price, so the total resource of gold is less than 10% hedged which makes them the same or better than Newmont.
If they intended to pay off their total debt, and close out all the hedges,...they would have had to do a PP for a lot more than the current one. 400,000 oz x 325 x 1.5 = CDN$195 million alone + something for the called written options,...probably half at least so close to $300 million Canadian plus the $140 million to pay down the loans to total around CDN$440 million,...which is a little more than the PP is worth. |
