Miners return to hedging as gold prices lose shine
By Jack Farchy
Financial Times, London
Sunday, August 4, 2013
Gold miners have started to protect themselves against more falls in the price of the precious metal, in a tentative return to the long-shunned practice of hedging.
Hedging by selling future production at fixed prices fell out of favour in the industry as gold rallied over the past decade, and several large gold miners such as AngloGold Ashanti and Barrick spent billions of dollars to unwind their hedges.
Although major gold miners have yet to return to the practice, several senior precious metals bankers said that small and medium-sized gold companies had rushed to hedge in recent months. The move comes as gold prices tumbled nearly 30 per cent since the start of the year to a low of $1,180 a troy ounce in June.
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"We're seeing more genuine hedging in gold than we have for some time," said Martyn Whitehead, Barclays' head of metals and mining sales. Societe Generale, one of the main financiers of the mining industry, said in a recent sales note to clients that miners were "queueing [up] to bullion banks to discuss short-term hedging arrangements."
The shift in philosophy toward hedging reflects mining executives' fear that the past month's rebound in gold prices may be short-lived, as well as the recognition that more falls in prices could push them into losses. Bankers said the hedging had accelerated as prices rallied from their June low to $1,313 last week.
The mining industry has a chequered history of hedging. The practice was most prevalent in the late 1990s, just before gold began a decade-long bull market, while by the time gold prices peaked in 2011, miners had cut their hedging to almost nothing.
Several senior bankers estimated that 50 tonnes or more of gold had been hedged so far this year, adding that a number of miners were discussing more hedging deals.
While unlikely to have a large effect on gold prices, that represents a dramatic increase from the depressed levels of hedging activity in recent years. The total amount of future gold production that has been hedged, known as the global "hedge book," has fallen to just over 100 tonnes, or 2.5 per cent of annual demand, according to Thomson Reuters GFMS. That is down from a peak of 75 per cent at the end of the 1990s.
"In the last 3-6 months we have seen more hedging activity in gold than we've seen in the last 3-5 years," said Mr Whitehead of Barclays. "I would estimate 1.5-2 million ounces have been hedged globally."
The highest profile hedging activity has come from Petropavlovsk, the London-listed gold miner, which has hedged about half its gold production -- although bankers say several other deals have not yet been made public. Peter Hambro, Petropavlovsk chairman, said the "timely" move had "helped to secure our cash flows."
The majority of the recent hedging deals have come from miners in Africa and Asia, bankers said. Unlike the bumper deals of the 1990s when miners sold forward several years production, now producers are largely hedging their production for just the next year or so.
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