Cutifani gold gamble paying off

[] — CALL him lucky, or gifted with seer-like foresight, but AngloGold Ashanti CEO, Mark Cutifani, probably earned the salary unions have been saying he, and his executive brethren, don’t deserve.

Executives are employed to make important decisions, such as deciding to bite the bullet by buying back a 11.3 million ounce hedge position – nearly two-and-a-half years of AngloGold production – which is where the company’s forward sales contracts stood at the start of 2008, according to company records.

The last 3.2 million ounces were bought back in 2010 following a $1.58bn equity and convertible share issue, cash and debt. All in all, AngloGold put some $6bn into removing its forward sales book, the last tranche at an average $1,300/oz. At the time, Cutifani said he was “bullish on gold’, but he couldn’t have imagined the metal’s current appreciation.

Even during the period AngloGold was buying back its hedged positions, the price of gold was rapidly appreciating; in fact, some 61% from 2008 (the date of the declaration AngloGold would buy-back its hedge book) to October 2010. Cutifani might have been forgiven for thinking AngloGold had missed the boat.

No siree. The average price of AngloGold’s buy-back over the three years was just shy of $1,000/oz. Factoring in an average discount of 10% which AngloGold had been receiving on annual production of 4.5 million ounces, against a gold price today of, say, $1,800/oz, the hedge would have been a loss to cash flow of $810m, or R6bn at a rand/dollar of 7.2. By way of perspective, this is equal to the amount of capital AngloGold Ashanti is investing in new production.

“It’s hard to think why gold producers would ever hedge the metal again.”

Flip the coin and the removal of the hedge is, year-on-year, a more than doubling in third quarter profit of some $342m from $129m; cash flow increased to $635m from $386m. It’s hard to think why gold producers would ever hedge the metal again. Certainly, gold hedging barely plays the part it once did.

According to GFMS’s latest hedging report, total global forward contracts for gold have fallen to about five million ounces (consisting of options, forwards and gold loans) from just below 20 million ounces in the third quarter of 2008.

Commenting on prospects, GFMS believed that some 800,000 oz of de-hedging would occur this year leaving the global book at some 3.8 million ounces, a mere 121 tonnes. It added that despite comments of a more “balanced’ approach to hedging – a return to it – there had been no evidence of this so far.


I’m not sure George Soros pulled all his exposure to gold – he was the one saying gold was in a bubble – but there was certain economic virtue in staying loyal to the yellow metal this year. Take John Paulson of Paulson & Co, among the single largest shareholder in Cutifani’s AngloGold Ashanti, and in Gold Fields.

Paulson built a significant position in gold’s main ETF producer, the SPDR Gold Trust. In fact, of the $36bn Paulson & Co has under management, about $4.4bn was in gold. Since 2009, Paulson’s gold investments have doubled after buying at an initial average of $910.03, to be exact.

Sadly, you can’t have it all.

Paulson also had significant positions in Bank of America (down 57% since January), and Citibank (down 46% from its peak) as he was banking, literally, on recovery. As a result, Paulson & Co is down 33% this year. Perhaps gold is bailing him out as we speak.