Gold's Top Performer Adds to Hedging Reboot as Price Soarsby
Long-term gold hedging gave producer strategy its `bad name'
Miners outside U.S. are benefiting from weaker currencies
With gold prices soaring this year after three years of losses, the world’s best performing bullion company is looking to add to its hedge book as a growing number of producers move to lock in profits.
St Barbara Ltd., the biggest gainer on the 44-member Bloomberg Intelligence Gold Mining Competitive Peers Index in the past year, Evolution Mining Ltd., Australia’s second-biggest producer, and South Africa’s Harmony Gold Mining Co. are among companies who’ve put in hedges this month spurred by prices hitting highs in some local currencies.
Hedging enables mining companies to sell future output at fixed prices to secure loans and protect margins. It’s a strategy that’s been shunned by investors and producers who spent at least $10 billion at the end of the last decade unwinding unprofitable forward sales as prices surged to a record.
Producers now are focused on shorter-term hedging often over periods of months, not years, according to Stephen White, a Sydney-based director at Noah’s Rule Ltd., a risk advisory company that works with miners. “What gives hedging a bad name are long-term hedges that are not managed properly,” he said by phone.
Companies with costs denominated in currencies including the Canadian dollar, Brazilian real and Australian dollar -- and also some U.S. dollar producers -- are expressing new interest in using hedging, White said. “There’s still probably more to come.”
Spot prices have jumped about 15 percent this year and touched $1,263.48 an ounce on Feb. 11, the highest level in a year, on mounting expectations that the Federal Reserve won’t raise U.S. interest rates further in 2016. The appreciation of the U.S. dollar has further bolstered the price of the gold when valued in the miners’ local currencies, while at the same time reducing the relative cost of production.
“The prices we’ve achieved are at or near the all-time high in Australian dollars,” Evolution’s Sydney-based Executive Chairman Jake Klein said in a phone interview. The company aims to hedge about 25 percent of its production and said Friday it sold forward 150,000 ounces at an average price of A$1,764 ($1,257) an ounce with scheduled deliveries out to June 30, 2020.
St Barbara, which typically has about a third of its production hedged, took out contracts on 40,000 ounces this month to reduce price risk associated with a planned $36 million debt repayment, adding to 100,000 ounces of forward sales agreed in April. “We’re not trying to speculate on the gold price, we are trying to manage risk,” CEO Bob Vassiesaid in a phone interview. The company, which has advanced almost 740 percent in the past 12 months, is “certainly looking at that possibility now” of additional hedging, he said.
Analysts are divided over the direction of gold. While Goldman Sachs Group Inc. said this month prices will slump to $1,000 an ounce in 12 months, ABN AMRO Group NV’s Georgette Boele upgraded her year-end forecast to $1,300 from $900 on prospects for a longer period of weaker global growth. Gold could rally to as much as $1,400 should global risk aversion intensify, according to Oversea-Chinese Banking Corp. economist Barnabas Gan. However, Gan’s base-case forecast is for a range of $1,000 to $1,150 by the end of 2016.
“I could make a very compelling case for the gold price to go up substantially -- by the same token, you can make a case for the price to fall, so it’s a challenge,” Perseus Mining Ltd. CEO Jeff Quartermaine said Monday by phone. The producer has a policy to cover as much as 40 percent of its output with hedging. “It’s a philosophy that not everybody signs up for, but we think that managing price risk is a very sensible tool.”
Producers lose out when the spot bullion price rises above the value used for forward sales, as happened at the end of the last decade. Critics regard the technique as capping potential future earnings in exchange for guaranteed returns.
Hedging is “a huge mistake -- the risk is on the upside with the gold price,” said David Harquail, CEO of streaming company Franco-Nevada Corp. “You hedge your input costs, but you don’t hedge your primary commodity that investors buy you for,” he said in an interview Thursday in Melbourne, adding he understood it made sense to use the strategy to cover a debt obligation.
Overall, miners remain unwilling to use large-scale hedges amid a reluctance from shareholders to see limits on their upside potential, according to the World Gold Council. Gold-streaming deals are providing an alternative and also affecting the level of hedging, the council said in a report published this month. Glencore Plc this month agreed a $500 million deal with Franco-Nevada to sell precious-metals output from a mine in Peru.
After three straight annual falls in the price, it’s understandable that producers may seek some protection, Jordan Eliseo, Sydney-based chief economist at trader Australian Bullion Co., said by phone. “For someone in the business of mining gold, these are -- outside of U.S. dollar prices -- pretty good times to be locking in at least some of that profit margin.”