Gold miners probably won’t return to “large-scale” selling of future output seen in the 1990s that added to supply even as the co-chairman of Barrick (ABX) Gold Corp., the top producer, says hedging makes sense, Barclays Plc said.
Prices have climbed faster than costs over the past 10 years even after falling this year, curbing the incentive to hedge, the bank said in a report e-mailed today. If companies mining gold as a by-product hedged all of their output, about 250 metric tons would be added to supply, equal to about a month of global production, it said.
Producers that boosted the global hedge book to more than 3,000 tons by 2001 to lock in returns then added to demand by closing out those positions as gold rallied for 12 straight years. The hedge book was down to 96 tons by June, according to Societe Generale SA. John Thornton, co-chairman of Barrick said this week that hedging makes sense and is worth considering.
“The margin between costs and prices has narrowed significantly,” Barclays analyst Suki Cooper in New York wrote in the report. “Hedging has materialized. Despite our expectations for prices to remain under pressure over the next couple of years, we do not expect large-scale hedging to the magnitude seen during the 1990s to return.”
Gold for immediate delivery traded at $1,241.25 an ounce by 2:06 p.m. in London, down 35 percent from the record $1,921.15 set in September 2011. A price of $1,200 is a “sensitive” level given that 10 percent of “the curve is under water” after factoring in capital expenditure, Barclays estimated. That figure rises to 14 percent at $1,000.
Average marginal cash costs of production climbed to $1,031 an ounce, from $974 in the third quarter of 2011, Barclays said. Prices are about 50 percent above the average cash cost, while in the 1990s, when producers increased forward sales, this margin was about 30 percent in some years, Barclays said. The hedge book totaled less than 500 tons in 1991, according to the bank.
Investors sold 800.8 tons through gold-backed exchange-traded products this year, wiping $68.9 billion from the value of the funds, as some lost faith in the metal as a store of value. Signs of a strengthening U.S. economy added to the case for the Federal Reserve to slow stimulus, easing concern about faster inflation and a weakening dollar.
“I always thought it made great sense to hedge,” Barrick’s Thornton, set to succeed Chairman Peter Munk next year, told reporters at the company’s Toronto headquarters this week. The company spent at least $5.6 billion in 2009 to get out of fixed-price sales contracts as it bet on rising gold prices. The price slump helped erode earnings and prompted gold producers to take at least $26 billion of writedowns this year.
Mining companies will hedge a net 10 tons in 2014, after buying back 30 tons this year, Barclays estimates. Prices will average $1,310 next year and $1,190 in 2015, it forecasts. The metal averaged $1,424 since the start of January.
“Large-scale hedging is likely to be limited, given the time and money invested in unwinding positions and in light of continued shareholder preference for exposure to the underlying price,” Barclays wrote. “The pace and size of hedging will accelerate should prices continue to fall and, in return, hedging or additional supply could weigh further upon prices.”
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