Interesting things that gold company heads are saying...
"He rejected the idea that with gold prices recently doing better it may be time to reinstate hedges. 'It's too early. We're going to have another eight years of a strong market,' he said. He said about two-thirds of the industry was hedged."
Gold companies turning against hedging
By Judith Crosson
DENVER, Oct 1 (Reuters) - Hedging, a standard tool of financial management aimed at locking in a profit if prices fall, is almost a dirty word for major gold producers now that prices for the precious metal are close to three-year highs.
"We don't do it. We don't believe in it," Meridian Gold Group<MDG.N> President and Chief Executive Officer Brian Kennedy said on Tuesday at the Denver Gold Group's Mining Investment Forum.
In hedging, producers can sell in the futures or forward market contracts that represent their production. If the price of gold falls then the producer can cover or buy back the position at a lower price. But if the price of gold rises, covering the position cuts profits.
Companies like Denver-based Newmont Corp.<NEM.N> have been on record for years saying that investors who want a pure gold play should buy its stock, but now other companies have seen how a hedge position can put a cap on profits.
"We've taken the no-hedge pledge," Glamis Gold <GlG.N> Chief Executive Officer Kevin McArthur told the conference.
Even silver producer Coeur d'Alene Mines Corp. <CDE.N> Chairman and Chief Executive Dennis Wheeler told the conference on Monday the company does not hedge.
Some companies must still open a hedge book when lenders require it as a condition for financing, representatives said.
"We did it (hedge) in our history for bank loans, but we closed it out in 2001," Meridian's Kennedy said.
Goldcorp Inc.<GG.N> Chief Executive Officer Robert McEwen, who calls hedging "toxic," said companies would be better off considering other funding alternatives such as selling an equity stake to finance a project rather than going to a bank which will insist on a hedge.
"The industry says 'don't worry about a hedge, we can roll it over and avoid a margin call.' But if the price of gold rises $70 an ounce you're wiping out shareholder value," he told Reuters.
He rejected the idea that with gold prices recently doing better it may be time to reinstate hedges. "It's too early. We're going to have another eight years of a strong market," he said. He said about two-thirds of the industry was hedged.
McEwen said gold producers have cash on hand and should not be compared to high-technology companies that saw incredible stock price rises based on a hope that they would make money in the future.
Kinross Gold Corp.<KGC.A> Chief Executive Officer Robert Buchan said after his company announced in April it would not renew a hedge on 500,000 ounces of gold he got a telephone call the next day from a major U.S. bank, saying it was interested in buying a large block of stock. "There is no way on heaven or earth that I'm hedging," he said.
LIKE A RELIGION
Louis Gignac, chief executive officer of Cambior Inc. <CBJ.A> said his company has a target of reducing its hedge position to one million ounces by the end of the year, from 1.4 mln ounces reached at the end of July, which was already a decline.
But he's not quite on the "anti-hedge" bandwagon yet.
"People tend to take a religious positions regarding hedging. I'm not really part of the gold religion yet. I think hedging is a management instrument that you may want to use or not use, depending on what you view the gold market will do.
Nevertheless with gold strong these days, hedging may not make a lot of sense, Gignac notes.
"A producer should be more exposed to the gold price in a rising market. It's as simple as that.
He said a decision on hedging should depend on what it costs a company to mine gold.
Barrick Gold Corp.<ABX.N> Chief Executive Office Randall Oliphant found himself having to defend the company's history of defending, saying the procedure goes in and out of fashion.
An investor from a Texas teachers' retirement plan told Oliphant he would like to see the company reduce its hedge position. "I hear what you are saying and your opinion is important to us," Oliphant said.
But he added that hedging Barrick's hedging program had generated $2 billion since 1987 which provided funding for development projects.
"Today we need it less than in the past," he said, because of higher gold prices and lower interest rates.
(Additional reporting by Jeanie Stokes)
10/01/02 18:58 ET
Copyright 2002 Reuters |
