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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: d:oug who wrote (44990)	11/13/1999 11:02:00 PM
From: P P Bravo	Read Replies (1) \| Respond to of 116909

Friday November 12 1999 GOLD: Miners face hedges question The industry is split over the necessity or wisdom of covering rises and falls in the gold price, writes Gillian O'Connor "Somebody in the industry needed to make a statement about getting rid of hedges. I believe hedges have largely or partly contributed to the low price we have had to live with. It is folly for us all to continue to do so." This messianic statement could well come from one of the "prairie farmers" of East Anglia. In fact it comes from Chris Thompson, chairman of Gold Fields, South Africa's second largest gold producer. Large-scale sales of gold by some miners in connection with their hedging programmes are blamed for driving the gold price down to below $260 per ounce earlier this summer. Independent analyst Gold Fields Mineral Services commented in early September that the miners were selling both when the price rose, and when it fell, and that it was the enormous growth in hedging and short-selling that forced the price down. But not all the miners want to uproot the industry's hedges. Some of his rivals argue that Mr Thompson, who recently closed virtually all Gold Fields' hedges, is being unwise and that his purist strategy will ensure the company performs worse than its peers. Barrick Gold, Canada's largest gold miner, which says that hedging has earned it an extra $1.5bn over the last 12 years, insists that its programme will continue to provide additional revenues regardless of whether the metal price is rising or falling. The company's share price, now substantially lower than it was at the end of September, suggests investor concern about Barrick's hedge book, in the opinion of some analysts. But Randall Oliphant, the company's chief executive, argues robustly that there is a world of difference between a good hedging programme and a bad one. "We fully understand analysts' concern . . . for companies who recently engaged in some form of hedging as a means of damage control . . . Faced by a low gold price they were reacting desperately to the possibility of insolvency, or pressure from banks, or simply frightened directors. Barrick's situation is as different as night and day." AngloGold, South Africa's largest gold miner, and Placer Dome, Canada's second largest, both share Barrick's belief in the merits of sensible hedging, and retain substantial hedge books. Australian companies, such as Normandy and Sons of Gwalia, have also spoken up in defence of hedging. The Australians were early entrants into hedging, and some have very large books. But even those with relatively small books sport some fairly exotic exotics. Delta, for example, explains in a footnote to its 1999 accounts that its contingent call options "do not exist unless the Australian dollar gold price trades at or above barriers between $450 and $600 on specified dates". But the Australians do not appear worried about margin calls. The two miners with margin problems, Ashanti and Cambior, both had some contracts that increased their exposure if the gold price rose. At Ashanti a worst-case scenario would at one point have pushed its exposure up to 70 per cent of its reserves. Cambior this week published a simulation showing that on a gold price of $350 its exposure would be more than 60 per cent (see table). The anti-hedgers include South African Harmony and Newmont of the US. Harmony confirmed recently that its strategy was to remain unhedged. Like Gold Fields, it has publicly blamed hedgers for driving the prices down this summer, and argues it is too early to know whether hedge books will become a long-term asset or liability. Newmont is in the embarrassing position of having abandoned its traditional anti-hedging stance this summer, at what with hindsight looks exactly the wrong moment. It dived into the hedging market when the metal price was near its nadir, and has been left sitting on book losses. It says it will not be doing any more hedging. This split within the mining industry is particularly controversial now, but the dispute itself is far from new. Fund manager Mercury, for example, has always argued that it prefers to invest in companies that do not hedge, because analysts and investors can work out what the effects of a given rise or fall in the bullion price will be on those companies. Shares in a company such as Harmony, which does not hedge, respond strongly to gold price movements, because profits are correspondingly volatile. Investors who get it right can make a lot of money from such shares. And they argue that although unhedged mining shares may be intrinsically risky, the risks are obvious for all to see. Most investment analysts say that at the least miners who continue to hedge are going to have to provide far clearer information in future. Some suggest that fund managers are going to avoid even miners with "plain vanilla" hedges, because they add to the complexities of investment.