Newcrest says its hedge closing supported gold price

From Reuters
via Yahoo News
Tuesday, September 11, 2007

http://asia.news.yahoo.com/070911/3/37pa2.html

SYDNEY, Australia -- Australia's Newcrest Mining Ltd. said on Tuesday its gold buying spree that scooped more than 2 million ounces of gold in the last few weeks had helped fuel a sharp rise in world bullion prices.

Gold traded above the key $700 level on Monday, within sight of a 16-month high, with dealers pinning gold's leap to a weaker U.S. dollar and bullion's safe-haven investment status.

But Newcrest Managing Director Ian Smith said the company over the last few weeks had purchased 2.3 million ounces of gold on the open market at an average price of A$831 an ounce to fund a plan to unwind a massive out-of-the-money hedge book. He did not give a U.S. dollar equivalent value.

"It's hard to put an exact figure on it, but we had an influence on the gold price," Smith told reporters.

He said Newcrest planned to buy a further 1.7 million ounces of gold over the next 12 months as part of its plan to exit its gold hedges.

Newcrest, which this year expects to mine 1.8 million ounces of gold, has hedges covering 4 million ounces at an average price of A$570 an ounce, maturing at a rate of around 700,000 annually until 2013.

Gold miners typically hedge more -- contracting to sell nuggets not yet mined at fixed prices -- when they think bullion prices are in long-term decline, but like greater exposure when the gold price is running higher.

Newcrest is the latest in a line of gold miners globally reducing their hedges, including Barrick Gold Corp., Newmont Mining, Lihir Gold Ltd., Harmony Gold, AngloGold Ashanti, and Buenaventura.

Unwinding the hedges will meet demands by Newcrest's shareholders for the company to become fully exposed to market prices, which have mostly been on the up for the last six years.

"From an investor sentiment perspective, removal of the hedge book makes sense," Credit Suisse said in a client note.

At the same time as it abandons its hedges, Newcrest was also buying A$80 million worth of new gold put options. A put gives the holder the option but not the obligation to sell.

Smith said this would give the company a guaranteed floor price of around A$800 an ounce on between 25 and 28 percent of production over the next five years, while leaving it open to any price above that level.

"This makes sense, but why not take puts out on all the production and eliminate the risk altogether on the downside?" said Sean Russo, managing director of corporate risk advisor Noah's Rule in Sydney.

Gold in Australian dollars has consistently traded above A$800 a ounce since August 10.

A planned A$2 billion ($1.65 billion) capital raising will also reduce Newcrest's gearing from 49 percent to 15 percent.

It would also allow the company to be cash-flow positive for at least the next five years, Smith told a briefing.

Analysts said that by closing out the hedges, Newcrest may also be removing an impediment to potential predators, who have overlooked Newcrest despite widespread sector consolidation.

"Having those hedges off the books can only help," said Fat Prophets analyst Gavin Wendt.

Shares in Newcrest last traded on Monday at A$24.80. The shares were placed on a trading halt for the capital raising and are scheduled to resume trading Sept. 17. ($1=A$1.21)

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