Newcrest Betting on Higher Gold Prices with Hedge Closure
By Jon A. Nones
10 Sep 2007 at 03:52 PM GMT-04:00
resourceinvestor.com
St. LOUIS (ResourceInvestor.com) -- Newcrest Mining Ltd. [ASX:NMC] today announced plans to sell A$2 billion ($1.6 billion) of stock to close its hedge book and repay debt. Australia's largest gold-mining company now joins the ranks of Newmont and Barrick with full hedge closures and absolute confidence in higher gold prices.
In a statement released after the market closed in Sydney on Monday, the company said the closures will “provide full upside exposure to the gold price,” and “improve the credit profile of the company.”
Newcrest said it will close out all of its gold hedging contracts and gold loan embedded sales contracts for A$842 million. The company has pre-purchased 2.3 million ounces at an average price of A$831 per ounce (US$685) - 2.5% below current market prices.
The company will offer shareholders 7 new shares for every 20. New shares will be priced at A$17.40 each, a 30% discount to the closing price on 10 September 2007. With about 335 million shares outstanding, Newcrest has a market cap of about A$8.3 billion.
Newcrest intends to temporarily leave the remaining 1.7 million ounces of longer dated gold bullion forward sales contracts in place until they expire within 12 months. But by mid-2008, Newcrest will have closed all 4 million hedging contracts.
In November 2006, Newcrest announced a restructuring plan the company’s hedge book, which involved deferring delivery of 1.6 million hedged ounces to the final three years of a four-year period. In the second quarter of 2007, the company cut just 150,000 ounces.
After just completing a major restructuring in November 2006, today’s announcement “shows they are confident on the gold price going forward,” Matthew Turner, commodities analyst at Virtual Metals, told RI. “I can't really say for sure about individual companies, but I think Newcrest's actions will encourage the others, so to speak.”
Virtual Metals’ Mitsui Gold Hedging Report showed that the world's top gold mining companies accelerated their dehedging in the second quarter, closing out forward contracts totalling 5.4 million ounces.
In early June, Newmont said it had closed its entire portfolio of forward gold sales, covering 1.85 million ounces at a cost of $578 million, originally committed to deliver the gold in 2008, 2009 and 2011 at prices of $381-$392 an ounce. The average gold price in May was $667.80/oz.
In early May, Barrick said it had exited all corporate gold sales contracts with the sale of 2 million ounces of gold at fixed prices that were 41% below current bullion spot prices. The company said it sold gold at an average price of $386 an ounce in the quarter, 28% lower than a year ago.
Barrick has eliminated over 22 million ounces of Barrick, Placer and Homestake hedges over the last 5 years at prices significantly below current prices.
Gold Fields [NYSE:GFI] previously closed out the remaining 700,000 ounces of the recently acquired Western Areas’ hedge book at an average spot gold price of US$622.14/oz and a total cost of US$528 million.
Other major hedgers last quarter included Lihir Gold [Nasdaq:LIHR], which closed out their hedge book of 1.4 million ounces, and AngloGold Ashanti [NYSE:AU], which saw a reduction of 800,000 ounces. Additionally, Buenaventura [NYSE:BVN] cut 500,000 ounces, Harmony [NYSE:HMY] cut 200,000 ounces and Emperor Mines [ASX:EMP] cut 150,000 ounces.
“After Barrick and AngloGold, the next largest now is Kinross, who has less than 1 million ounces,” said Turner. “So unless Barrick or AngloGold do something the era of 'blockbuster', dehedging as we saw from Barrick, Lihir, Newcrest and Newmont is over.”
Barrick still has more than 9 million ounces of hedged gold to help finance its Pascua-Lama and Pueblo Viejo projects, which are required to be covered beginning in 2010. Barrick previously indicated that it was content to allow these forward gold sales contracts to continue.
AngloGold Ashanti still has about 11.1 million ounces, and has made no official statements about entirely eliminating its hedge book. In February the company said it would continue delivering broadly in line with the delivery schedule.
“They've said they will deliver into them, and that half will be due within 3 years,” added Turner.
Many gold producers increased forward sales when gold touched a 20-year low in 1999 to protect themselves against further declines. But recently mining companies have been unwinding forward sales contracts as the gold bull market surges ahead in its seventh year.
J.P. Morgan Securities said on Monday it expects gold to rise to $720 an ounce in the first half of 2008. J.P. Morgan said the six-month price target for gold is $715 an ounce.
Spot bullion closed above $700/oz in New York on Monday, rising $2.70 to $703.45 bid. Comex gold futures closed up $2.50 at $712.20.
Mark O’Byrne, director at Gold & Silver Investments Ltd. in Dublin, Ireland, noted the significance of gold surpassing the psychological barrier of $700 spot.
“Little commented upon by many but of importance is the fact that the close above $700 was only the 5th daily close above $700 in 26 years,” he said.
However, O’Byrne warned of some consolidation prior to a likely near-term challenge of the 27-year highs reached in May 2006.
But he added, “We continue to believe there is a good chance gold will challenge its record high price in 1980 of $850 before the end of 2007.”
James Moore, metals analyst for TheBullionDesk.com, also warned that some profit taking could be seen in the coming days should some of this week’s economic data prove positive for the dollar.
“However, given that froth in the equity markets is expected to worsen, and that gold has cleared two key resistance levels the bullish mood is set to continue with gold well placed to challenge last May’s high around $730,” he concluded. |
