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Gold dehedging to slow to 6-8 million oz in '08

27 Feb 2008 (miningmx.com) By Allan Seccombe

GOLD producers are forecast to reduce their hedge positions by between six and eight million ounces, bringing the global hedge book down to around 20 million ounces, according to the Fortis Hedging and Financial Gold report.

Gold companies were calculated to have cut a delta-adjusted 13.5 million oz out of their books, the largest such reduction since 2004.

“These declines are particularly impressive given the shrunken size of the book. On both measures more than a third of the remaining global hedge book disappeared in 2007,” the report said.

“The global hedge book is now less than 27 million oz, so if 2007.s rate continues, half of the global book would disappear. Although in the current anti-hedging climate this cannot be ruled out, we expect dehedging in 2008 to slow to between six million oz and eight million oz,” it said.

The breakeven price for the global book is $412/oz, up from the third quarter of 2007’s price of $375/oz. The book stands at a negative mark-to-market of $11.3bn against $10.7bn in the third quarter. Despite the large reduction of ounces in the book, the price of gold in the fourth quarter was $93 higher quarter-on-quarter.

For 2008, companies have 4.4 million oz of maturing contracts, of which AngloGold Ashanti accounts for more than half.

Over and above that, companies are likely to continue reducing their hedge positions, which have contracted to sell gold at levels below the record-high spot levels of above $900/oz.

Peruvian gold miner Buenaventura has closed 900,000 oz remaining in its hedge book during the first quarter of 2008.

Australia’s Newcrest, heading up a determined charge by miners in that country to cut their forward contracts, has taken out 300,000 oz and will have removed the remaining 620,000 oz by September 2008.

“That makes nearly two million oz, and it is not unreasonable to expect another two million oz to four million oz of this type of dehedging,” the report said, adding that new hedging in the fourth quarter of 2007 of 15,090 oz was the lowest recorded by Fortis and VM Group, who jointly researched the report.

While it is unlikely that the de-hedging rate will be as high as that for 2007, the report said: “the current optimism in the gold market the inevitable opportunity cost of having sold gold forward when the price is rising means that a surprise to the upside in dehedging volumes is more likely.”

AngloGold Ashanti’s hedge book is by far the largest in the industry, accounting for 42% of the global position or 11.3 million oz. The next largest is Barrick Gold with 7.8 million oz.

“As Barrick have come to the end of their major dehedging programme it is from AngloGold that any large dehedging could come,” the report said.

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