De-hedging accelerates

Against a backdrop of higher gold prices and lower interest rates, the global gold hedge book saw 5.2 million oz. trimmed from its pages during the three months ended June 30, helping to underpin the yellow metals’ recent rally, reports London-based Gold Fields Mineral Services (GFMS).

Gold Fields’ study, compiled in association with Investec Bank, notes that the second-quarter scaling down eclipsed that of the first quarter (5.1 million oz.), despite a 3% increase, to US$346 per oz., in the end-of-quarter hedge-book valuation price.

At quarter’s end, the delta-adjusted producer hedge book contained 69.7 million oz., 7% less than the previous quarter, and equivalent to 84% of 2002 production. The latest decline represents the seventh consecutive quarterly cut to global hedge positions.

The bulk of the reduction (3.7 million oz.) came via delivery into existing forward sales contracts and buy backs. At the end of June, 51.5 million oz. were covered by forward sales agreements, down 7% from the first quarter. Still, forward sales continue to dominate hedge books, accounting for some 74% of hedged oz., up from 73% in the first quarter.

The smaller book is also due to a 1.5-million-oz., or 9%, drop in “vanilla” options (simple put and call options) thanks in large part to a 25% reduction in sold call options by North American companies.

Denver-based Newmont Mining (NEM-N), the world’s largest gold miner, alone shed 3.5 million oz., 2.9 million of those by closing the Yandal gold hedge book it inherited when it merged with Australia’s Normandy Mining. The balance represents other closeouts and maturities. The Yandal hedge book had a mark-to-market value of minus US$19 million at the end of June.

Newmont hopes to be hedge-free by the end of the year.

AngloGold (AU-N), the world’s second-largest producer and the most-hedged of South Africa’s gold producers, reduced its hedge book by another 7% during the quarter to 8.7 million oz. Anglo says it will continue to reduce its hedge position toward a target of 30% of five year’s worth of production, down from a previous target of 50%. At the end of June, Anglo’s book had a mark-to-market value of negative US$179.3 million.

In Canada, Barrick Gold (ABX-T) converted sold calls into simple forwards resulting in a cut of 1.2 million oz., leaving 16.1 million oz. still committed. Barrick’s gold hedge book had a mark-to-market value at quarter’s end of minus US$615 million. Barrick’s aim is to reduce its hedge to 20% of reserves, or about two years of production.

GFMS says that by delivering into existing contracts and converting forward sales to put options, Placer Dome (PDG-T) trimmed its book by 700,000 oz. to 10.8 million oz. Placer’s book was US$223 million to the good at the end of June. Still, the company is looking to reduce committed ounces by 20% of reserves by year-end. That would see the book slip below 10 million oz., not counting hedges inherited via the recent acquisition of East African Gold Mines.

The global de-hedging tsunami was stanched only in Australia, due mostly to Newcrest Mining taking out 2.85 million oz. in new hedge agreements (mostly in U.S. dollar forwards) as required under a debt financing deal for its Telfer gold-copper project. Fellow Aussie WMC Resources (WMC-N) closed out 390,000 oz. worth of hedges maturing from 2006-2010.

On the financial front, U.S. and Canadian dollar contracts account for about 70% of the delta-adjusted global hedge book; Australian contracts make up 27% with the balance denominated in South African rand.

During the quarter, the yellow metal’s average spot price rang in at US$346.90 per oz., 1% lower than the first quarter, but 11% better than the corresponding period of 2002. GFMS says that the run up in April and May to around US$370 per oz. reflects weakness in the U.S. dollar and fund buying.

On average, producers realized US$351 for each oz. sold during the quarter; the hedgers generated a weighted averaged of US$352 per oz., while the non-hedgers averaged US$349 per oz.

The unwinding of forward positions helped boost global gold demand by 5.2%. Overall supply also climbed 5.2%. Supply from scrap jumped 10%, while mine production climbed by 2.1% year-on-year (though from a low base on poor Indonesia figures in 2002).

The quarter’s 3-month average gold lease rates were almost halved from the first quarter at 0.11% thanks mostly to lower demand for leased gold.