Gold miners return to net hedging

[] — Gold miners returned to net hedging for the first time since the last quarter of 2005 in the second three months of this year, metals consultancy GFMS and Societe Generale said in a quarterly report on Wednesday.

But the release showed they are lifting their estimated rate of dehedging for the full year, with gold miners now seen cutting the amount of gold they have sold forward by 4.21 tonnes this year, up from a previous estimate of 3 tonnes.

The hike is due to a recent announcement by number three gold miner AngloGold Ashanti that it will accelerate its buy-backs of outstanding hedges to gain greater exposure to soaring spot gold prices.

“In previous reports, we have referred to the likelihood of short-term, significant cuts to the remaining book being low, due to the limited size of the remaining book,” it said. “However, the September announcement by AngloGold Ashanti has heralded just such a swift transaction.”

Hedging allows producers to lock in guaranteed prices for future output, but it can backfire if the price of spot metal rises above the hedged price. The buying back of outstanding hedge positions was a key element of demand in past years.

The report said indications were that AngloGold will have completed its de-hedging by early 2011. The miner still had 3.06 million ounces hedged by the end of the second quarter.

AngloGold is currently the only major miner with a large outstanding hedge book, after the world’s biggest gold producer, Barrick Gold closed out its hedges last year.

Barrick Chief Financial Officer Jamie Sokalsky told Reuters at an industry event on Monday that the move gave the company “100 percent of the upside” to gold prices.

“It takes something that was negative in our stock price from a perception standpoint off the table,” he said.

Hedging returns

Figures included in the GFMS/SocGen report showed the global hedgebook increased 160 000 ounces in the second quarter on a net basis, against a reduction of 780 000 ounces in the first three months of 2010.

“The book was expanded primarily by way of additions to the options portion of the book, with new collar options positions added by St Barbara Mines to cover production from its King of the Hills deposit,” the report said.

Other forward sale positions totalling 300,000 ounces were also added by Perseus Mining, Integra Mining and Regis Resources, it added.

This was offset by some continued de-hedging activity, with AngloGold’s outstanding position falling 290,000 ounces in the second quarter.

The report added that GFMS and SocGen do not believe the gold mining industry is returning to gold hedging. “There is yet to be a discernable swing by producers towards a renewed appetite for strategic hedging,” it said.

“The new hedges seen in the second quarter… (were) based around project finance.”

Barrick’s Sokalsky said he did expect the company to consider hedging again in the foreseeable future.

“What became clear to us and others that were hedging was that investors in supply gold shares do want the leverage to the gold price,” he told Reuters.

“They look at us not only as a company that generates real earnings but also as a warrant on the gold price. They believe in the price of gold, they want companies that are unhedged.”

“I believe the pressures to hedge again are going to be very minimal, and I don’t see hedging coming back in favour in a large manner at all, even at higher gold prices. It is off the table for us.”