Statistics released on Tuesday show gold hedging declined by 2.3 million ounces in the fourth quarter of 2007 - the 23rd consecutive decline. With gold prices rallying to record highs, this comes as little surprise. The real surprise will come if and when AngloGold Ashanti closes out its massive gold hedge book early.
According to the “Fortis Hedging and Financial Gold Report,” published by the VM Group and Haliburton Mineral Services, Newcrest was the leading dehedger in the fourth quarter. It cut its position by 735,355 ounces. AngloGold Ashanti, Barrick Gold, Red Back Mining, Highlands Pacific, Austindo Resources and Lafayette Mining all reduced their positions by more than 100,000 ounces during the quarter.
In all of 2007, total dehedging reached 13.5 million ounces - the largest such reduction since 2004. More than a third of the remaining global hedge book disappeared. In 2008, there are 4.4 million ounces that are scheduled to be delivered. The study predicts dehedging to be between 6 and 8 million ounces in total for the year.
Buenaventura has already said it closed out the remaining 900,000 ounces, while Newcrest has removed 300,000 ounces and will have closed the remaining 620,000 ounces by September 2008. AngloGold Ashanti [NYSE:AU], however, is the key factor in gold hedging at the moment.
The world’s third largest gold producer has one of the largest hedge books, now at about 11.3 million ounces of gold, accounting for 42% of global gold hedging. About half of the company’s hedges are due for closure within 3 years, with 2.3 million ounces due for delivery in 2008.
“I think they'll do something additional to their delivery schedule, but perhaps not huge,” Matthew Turner, commodities analyst for VM Group, told RI.
Last quarter, AngloGold had the second largest reduction at 383,076 ounces. However, the company received only $687/oz for its production of 1.37 million ounces while the price averaged $787/oz. In Q1 08, with the company estimating production due to the power supply crisis at 1.1 million ounces, and with the gold price rising to $900/oz, the impact will be even greater if AngloGold Ashanti delivers into hedges at the rate expected.
New CEO Mark Cutifani continues to express his distaste for the company’s hedge book. In Dec. 2007, Cutifani said he will lead the company to a hedge-free position to take full advantage of high spot gold prices. This followed statements made during the company’s third-quarter headline earnings presentation.
Even still, Turner remains skeptical that AngloGold will massively reduce their hedge position given the expense. With falling production due to power shortages in South Africa, the company has more pressing issues at hand.
“I expect they'll think that the market will be happy with 2.3 million ounces of closures, particularly as I think it'll translate into delta-adjusted declines of a similar magnitude,” he said.
In 2007, Newcrest [ASX:NMC] was the largest dehedger, knocking 3.6 million ounces off its hedge book as part of their plans to remove the hedge entirely by September 2008. In mid-September 2007, Newcrest sold A$2 billion ($1.6 billion) of stock to close hedges and repay debt. The company pre-purchased 2.3 million ounces at an average price of A$831 per ounce (US$685) - 2.5% below current market prices.
Barrick [NYSE:ABX; TSX:ABX] cut 3 million ounces last year. In early May, the company exited all corporate gold sales contracts with the sale of 2 million ounces of gold at fixed prices that were 41% below current bullion spot prices. Barrick, however, still holds about 7.8 million ounces of forward gold sales contracts to help finance future projects.
Newmont [NYSE:NEM] closed out its remaining 1.85 million ounce hedge book in Q2 07. At a cost of $578 million, originally committed to deliver the gold in 2008, 2009 and 2011 at prices of $381-$392 an ounce. The average gold price in the April-through-June quarter was $668/oz.
In January 2007, Gold Fields [NYSE:GFI] closed out the remaining 700,000 ounces of the recently acquired Western Areas’ hedge book at an average spot gold price of $622.14/oz and a total cost of $528 million.
Lihir Gold [Nasdaq:LIHR; TSX:LGG] raised nearly A$1bn in an institutional entitlement offer to close out the entirety of its 1.5 million hedge book in Q2 07, while Buenaventura [NYSE:BVN] reduced its book by 1 million ounces.
In all these companies made reductions of 11.5 million ounces. Another 43 companies reduced their positions by a collective 4.6 million ounces, meaning a gross reduction of 16.0 Moz. The global hedge book is now less than 27 million ounces, so if 2007’s rate continues, half of the global book could disappear, according to the study.
In 2007, the spot gold price gained 32% from $632.5 to $836.50. In the fourth quarter alone, the yellow metal shot up 13% or $100. And so far this year, the price has smashed through all-time highs, now trading above $950/oz.
“With the gold price at record highs, mining companies continue to close out their hedge positions to take advantage of further gains. There is little sign of this stopping in the near term,” said Jessica Cross, CEO of the VM Group.
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