Hedging overshadows Gold Fields’ 2020, commits 1m oz in new contracts amid capex-heavy 2021

Gold Fields CEO, Nick Holland. Pic: Martin Rhodes

GOLD Fields quadrupled headline earnings to $729.3m (2019: $162.7m) in the year to December despite its results being negatively affected by realised losses from the group’s hedging policy through which it sold gold forward.

According to CEO, Nick Holland – who retires on March 31 to be replaced by former Anglo American Platinum CEO, Chris Griffith, – “… the group’s policy is to remain unhedged to the gold price”, but the latest financial statements show Gold Fields hedged one million ounces of expected gold production for 2021.

That production is all from its Australian mines and is equivalent to about 44% of the group’s total forecast production of between 2.3 million oz and 2.35 million oz for the 2021 financial year.

The reason for the continued hedging programme appears to be the group’s heavy capital expenditure programme which is expected to hit $1.2bn during 2021 with $508m earmarked for the Salares Norte mine in Chile. This would be in line with stated exceptions to the non-hedging policy which include “to protect cash flows at times of significant expenditure”.

“2021 is going to be a big capital expenditure year for Gold Fields given the peak spending at Salares Norte as well as the increase in sustainable capex for the group,” said Holland. “This increase in sustaining capex will enable us to spend on key projects that will allow us to sustain our production base of two million oz to 2.5 million oz for the next eight to 10 years,” he added.

The group has declared a final dividend of 320c a share bringing the total dividend for the year to 480c which is treble the 160c paid out in the 2019 financial year.

Amongst the string of other positive developments during 2020 were that net debt was reduced to $1.1bn at year-end ($1.7bn) and that all-in costs (AIC) were held to $1,079/oz (2019: $1,064/oz) which was within the revised guidance range of $1,070 to $1,090/oz.

In South Africa, the long-troubled South Deep mine generated net cash of $34m and increased gold production two percent to 7,056kg (6,907kg) despite the impact of the Covid-19 pandemic. But South Deep was hit hard by Gold Fields’ hedging activity which shows a net realised loss of $84.7m for 2020 for the mine.

According to Holland: “South Deep has shown continuous improvement through 2020. Had it not been for the Covid-19 disruptions, the mine would have exceeded its original production guidance.”

“For 2021 we expect a strong increase in production (plus 27%) to 290,000 oz. Looking ahead, we are reasonably confident that we can add another 20% to 30% over the coming three to four years,” he said.

As of end-December, Gold Fields reported a realised loss of $114.6m on gold hedges from its Ghana mines partially offset by an unrealised gain and “prior year mark-to-market reversals” of $36.4m.

In Australia, there was a realised loss “relating to all instruments” of $201,1m partially offset by an unrealised gain and prior year mark-to-market reversals of $71.8m.


  1. Hedging or futures sales?

    The gold futures market should allow precious metals producers to forward sell their production in order to raise capital. This is based on the principle of known production and the ability of being able to deliver the physical metal to the forward buyer.

    However, non-producing players enter the futures market as sellers too, without actually having the precious metal in hand to deliver. The intention to procure the metal after the “futures” sale is feigned. In effect these non-producers are front running sales against the actual producers.

    Consequently, this creates an oversupply, which leads to a reduction in the spot price.

    This is what is happening in the futures market to a very large extent and is limiting the ability of miners to receive a fair price for their product. Large, non-producing forward sellers, sell large numbers of future contracts in the market. The volume of sell side contracts reduces the price on the spot market.

    Low prices create margin strapped producers who are then forced to hedge their production via these same finance companies who in turn use the hedged production to deliver against their own forward sales.

    The mechanism allows these financiers to enjoy both the finance profit and the margin on a rising gold price. This works relatively well as most futures contracts are settled in cash or rolled forward and relatively little physical delivery actually takes place.

  2. Repeating the same loss making technique through hedging is a far cry from showcasing good leadership.
    The hedging debacle between 2005 and 2011 shows the gold price rise versus the miners not-rise over the period.

    If management is unable to resist the lure of this financial drug, then should they even be in management?
    Unacceptable, there is no excuse.

    Proclaiming a policy of being un-hedged and yet following a practice of hedging in the background, is nothing less than fraud committed by management and should be dealt with accordingly.

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