Gold-Hedging Talk Creeps In, But Miners Prefer Exposure

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Gold-Hedging Talk Creeps In, But Miners Prefer
Exposure
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• The recent slump in gold prices may have spurred
  some miners to consider hedging their gold sales,
  but the vast majority have so far resisted doing
  so because they expect gold prices will recover
  and they want full exposure to these gains.
• Spot gold has fallen 21 since the year began,
  prompting gold miners such as Russia-focused
  Petropavlovsk PLC (POG.LN) and Tanzania gold
  explorer Shanta Gold Ltd. (SHG.LN) to hedge,
  locking in a portion of their future gold sales
  at a fixed price to manage their cashflows amid a
  weaker gold price environment.

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• For Petropavlovsk, which locked in prices for
  about half of its production until June 2014, the
  move is aimed at managing its debt burden. Shanta
  Gold has hedged gold sales equivalent to nearly
  half of this years forecast gold output until
  March 2014, to help cover its debt and capital
  expenditure requirements as it carries out a
  five-year plan for gold production growth.
• Such moves may make sense for those companies,
  but investors generally prefer to hold shares in
  gold companies with full exposure to any
  potential rise in the price of gold.
• In principle, were anti-hedging, said
  Catherine Raw, co-manager of BlackRocks natural
  resources team, which has 5.9 billion invested
  primarily in gold-mining equity fund. We own
  gold shares because we want exposure to the gold
  price.

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• Gold miners risk losing money on hedges if they
  lock in their revenues for the long term at a
  fixed rate, but fail to control their costs in a
  similar fashion, Ms. Raw said.
• The gold industry suffered heavily over the past
  decade when many large gold miners hedged their
  sales following a prolonged period of low gold
  prices only to see the prices take off and mining
  costs rise. Several large gold miners spent
  billions of dollars trying to unwind hedges that
  became a drag on profits over that period.
  Barrick Gold Corp. (ABX), the worlds largest
  gold producer, was the last large gold producer
  to unwind its hedges when it raised 5.1 billion
  in 2009 to buy them back.
• Gold miners would have to be certain that the
  industry has entered a structural price decline
  before they broadly return to gold hedging, said
  Ms. Raw, but that is not our view. The downside
  risk to the current gold price is limited, as
  jewelry demand is robust and gold supplies are
  scarce, she added.

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• Gold producers are also reacting to the low gold
  price by shutting down unprofitable mines. Mark
  Bristow, chief executive of West African gold
  producer Randgold Resources Ltd. (GOLD), said
  last week he reckons that more than half of the
  industrys gold output is unprofitable at the
  current gold price.
• That said, Angelos Damaskos, CEO of Sector
  Investment Managers Ltd., which advises the
  Junior Gold Fund on 25 million worth of
  investment in 38 gold companies, said he believes
  the gold price has hit a floor and will rebound
  in the second half of this year. The gold price
  could even reach its previous record high of
  1,920.94 a troy ounce, set in September 2011, by
  sometime next year, he said.
• Although talk about hedging is creeping in among
  small to medium-size gold miners, investors and
  miners say it hasnt yet become pervasive. On the
  contrary, a recent J.P. Morgan Chase survey found
  61 of investors were still against miners
  hedging gold prices.

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• Gold producers continued to unwind their hedges
  in the second quarter following net dehedging in
  the first quarter, said precious metals
  consultant Thomson ReutersGFMS and Societe
  Generale bank in a jointly produced report.
• GFMS and Societe Generale expect net de-hedging
  to prevail over the rest of the year, since gold
  producers may believe they have missed the
  opportunity to hedge at a lower price.
• Gold sank to nearly a three-year low of 1,180.20
  an ounce in June, but has since rebounded to
  1,324.70/oz.