[miningmx.com] – HAVING collected nearly R14bn in value on the back of its leverage to the rand gold price in 90 days, Harmony Gold is to hedge about a third of its rand receipts to the tune of R6.2bn ($400m).
“The weakness in and volatility of the rand presented an opportunity to Harmony to esablish a very attractive minimum exchange rate on the US dollars we receive when we sell our gold,” said Frank Abbott, financial director of Harmony.
Harmony’s announcement was quickly followed by a similar gold price hedge agreement by the UK-listed Tanzanian producer, Acacia Mining. It said it had hedged the dollar denominated production from its Buzwagi mine in 2016.
Harmony’s currency hedge, which establishes a minimum and maximum exchange rate at which its future dollar gold sale proceeds could be exchanged into rands, would still give upside on improvements to the dollar gold price.
The move sees Harmony adopt a somewhat more cautious approach to its cash flow management given the share has already appreciated 266% in 90 days and has been some 7% weaker in the last seven days as the rand has firmed against the dollar.
Abbott said the hedge provided “… more certainty on our margins and cash flows, enabling us to reduce our debt, strengthen our balance sheet and provide us with further confidence that we can fund the Golpu project”.
On February 16, Harmony publishes details of its re-scoped Golpu project in Papua New Guinea saying the first phase of the joint venture would cost $2.6bn to build. Harmony shares the project with 50% joint venture partner, Newcrest Mining.
Golpu would produce 500 000 gold equivalent ounces per year on an attributable basis during peak production, said Harmony Gold.
Set against this funding challenge, the company also pledged in November to wipe out some R2.7bn in debt in two years.
It repaid R1.1bn in debt consisting of $50m of its $250m revolving credit facility and R400m on its R1.3bn rand facility in early December and has zapped a further $20m on the $250m revolving credit facility this year leaving the utilised balance at $180m.
The hedging contracts are spread over a 12 month period with an average floor price of R15.59/$ and an average cap price of R18.60/$, said Harmony.
To date, $400m (approximately R6.2bn) has been hedged. This amounts to approximately one third of Harmony’s expected US$ gold sale proceeds over a 12 month period, it added.
Brad Gordon, CEO of Acacia Mining, said of his firm’s hedging strategy for Buzwagi that: “We are taking a prudent step in locking in a gold price in excess of our planning price at Buzwagi, our shortest life asset which is in harvest mode”.
In terms of its hedge, the agreements provide a guaranteed floor price of $1,150/oz and provide exposure to the gold price up to an average of $1,290/oz covering 136,000 oz of production in 2016. Similar agreements may be made for 120,000 oz of Buzwagi production in 2017, it said.
“The mine generates the majority of its future cash flows over the next two years, and by putting in place these zero cost collars we reduce the gold price risk associated with this cash flow, while maintaining some exposure to future upside,” said Gordon.
The maximum gold production covered by the hedges represents around 15% to 20% of Acacia’s planned group production in both 2016 and 2017. “We are, and plan to remain, fully unhedged at our long-life assets, Bulyanhulu and North Mara,” said Gordon.
