Why are gold mining producers reducing their gold hedge books

The simple answer is that gold producers realise that the odds favour an increase in the price of gold in the near future.  Therefore on any weakness in the price of gold, gold producers are either completely unhedging themselves or are reducing their gold hedge books to manageable levels.

In AngloGold Ashanti’s case below, they have reduced their hedging exposure by some 1.4 million ounces.  This has lowered their hedging now to less than a year’s production.

What is a gold hedge book?

Gold producers use gold hedging to contractually lock in a gold price for when their gold is produced, regardless of whether the gold price in the future is higher or lower.

Gold hedging has been around for a long time and is primarily used to protect a gold mine from unexpected large drops in the price of gold.  By hedging at a certain price, gold miners are able to guarantee that their operating expenses will be paid, and thus avoid bankruptcy.

As the price of gold has generally been in a decline since 1980, it has benefited gold miners to hedge their production  However since 2001, gold miners that have been heavily hedged have faced financial ruin. Take this previously reported case of an Australian gold miner called Sons of Gwalia which bet that the price of gold would continue to fall.

Large gold mining companies are rapidly changing from Gold Hedging to Gold De-Hedging as they prepare for what lies ahead in this gold bull market. This is a strong indication to where the smart money is heading.  The price of Gold is going to go a lot higher in the not so distant future.

This morning, one of South Africa’s largest gold mines has done just that.  Anglogold Ashanti has greatly reduced its gold hedging book.  The following is courtesy of Mineweb [emphasis added our own]:

“South Africa’s top gold miner, AngloGold Ashanti, reduced its gold hedgebook in July to well below a single year’s production.

Tier 1 gold miner AngloGold Ashanti has taken advantage of a strong earnings position to further reduce its gold hedge book in July by some 1.4 million ounces.  This brings the total amount of gold hedged to less than a single year’s production.  This indicates the company’s continued confidence in the forward price of gold, maximising its exposure to the spot price.

 “We’ve worked hard to strengthen our balance sheet and that gave us the flexibility to skin the hedge book by getting it well below one year’s production,” Chief Executive Officer Mark Cutifani said. “The market fundamentals are extremely robust for gold, which supported our decision to move aggressively sooner rather than later, to ensure we maximize our exposure to spot prices.”

AngloGold’s hedge commitment now stands at 4.47 million ounces – down from 5.84 million ounces at the end of the first quarter, and Cutfiani says that the company anticipates achieving a 7% discount to spot prices at a $950 an ounce gold price, with the hedge book reducing at 800,000 ounces a year which would mean the company would be unhedged by end 2014.  This year the book would reduce to around 4.1 million ounces – a year ahead of the original target date.

The July reduction was enabled through using some of the proceeds of the successful issue during the quarter of the five-year convertible bond, proceeds from the sale of AngloGold’s stake in Boddington in Australia to fellow Tier 1 gold miner, Newmont and strong Q2 earnings.”

So, when looking to invest part of your hard earned cash into gold miners, take a long hard look at this most important event unfolding. Look for gold producers that are either totally unhedged or mostly unhedged as we head towards a higher gold price in this unfolding financial crisis.

However bear in mind, some banks/lenders do require junior gold mines to have a certain percentage of gold hedged as in some cases the bank/lender  requires  hedging in order to guarantee collateral for the loan.

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One thought on “Why are gold mining producers reducing their gold hedge books

  1. Pingback: Professor Fekete: Why Barrick Gold has ended Gold hedging | Gold Investing Guide

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