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Miners bet on gold in massive de-hedging

Posted: Thu, 04 May 2006

[] -- BARRICK Gold, the world's largest gold producer, joined the ranks of the world's de-hedgers lopping 4.7 million oz from its forward contracts book in the last quarter.

As if it were needed, this provided further evidence that gold producers were more optimistic about the gold price than ever before, analysts said.

Four years ago, the combined hedge book of gold mining companies stood at 100 million oz. It now stands at 48 million oz, nudged down by Barrick in the biggest single company reduction of a hedge book, according to the Mitsui Gold Hedging Report.

“The combined hedging has been reduced massively because of expectations of rising prices and the mining companies have been correct in that assumption,” said Matthew Turner, an analyst at London-based Virtual Metals.

“This de-hedging had been coming to an end with less in recent quarters partly because some of the very large hedge books have been reduced. The higher the gold price goes the more expensive it is to do this,” he said.
expectations of rising prices
The last two quarters of 2005 saw less than 500,000 oz de-hedged. “This quarter is quite anomalous, really,” Turner said.

While full data is not yet available, Mitsui estimates some five million oz have been taken out of the global hedge position in the first quarter of 2006, bringing it to 48 million oz.

"This is the largest quarterly decline since first quarter 2003 when the global book was a much larger 78 million oz," Mitsui said.

Barrick, the world’s largest gold producer since taking over Placer Dome, said at the release of its first quarter results it had reduced the Placer Dome hedge position by 5.7 million oz at a cost of $1.2bn as of May 03.

"The impact of closing out 5.7 million oz of gold hedges is to increase future gold revenues, as we forecast gold prices going forward to be higher than the average $554 in first quarter 2006," said RBC Capital Markets analyst, Stephen Walker, said in a note.

"This revenue lift more than offsets the $1.2bn in costs incurred to date," he said.

Barrick intends eliminating another two million oz of the Placer Dome position by the end of this year, and the remaining 2.8 million oz of the corporate gold sales contract position no later than the end of 2009.

“Barrick’s enormous hedge book reduction provides a compelling explanation for the robust gold price in Q1 and into Q2,” said John Levin, Mitsui Global’s head of marketing.
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“Clearly, such a rate cannot be sustained by Barrick or anyone else, but the big question for hedging is what impact will it have on other companies’ hedging or de-hedging decisions,” he said.

More companies that have hedge books are yet to report their quarterly results, notably AngloGold Ashanti, which releases results on Friday afternoon.

By the end of December 2005, the world number three gold miner’s net delta of its hedge book was 10.84 million oz, which when it released its results in February stood at a negative mark-to-market of R15bn. The position represented 35% of five years production spread over 10 years.