Gold-Hedging Talk Creeps In, but Miners Prefer Exposure
The recent slump in gold prices may have spurred some miners to consider hedging their gold sales, but the vast majority has 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.
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 year’s 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, we’re anti-hedging,” said Catherine Raw, co-manager of BlackRock’s 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.”
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 world’s 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.
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 industry’s 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 hasn’t yet become pervasive. On the contrary, a recent J.P. Morgan Chase survey found 61% of investors were still against miners hedging gold prices.
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.