Hedge books worry Ashanti, Cambior

The well-publicized troubles of Ashanti Goldfields (ASL-N), whose hedge book reached a negative paper value of US$450 million early this month, appear to be easing as the potential loss shrinks. Ashanti announced that its hedging counterparties have renewed a standstill agreement worked out in early October in which they undertake not to make any margin calls.

Lonmin, which had offered 0.744 Lonmin share for each share of Ashanti — effectively bidding US$7.50 a share — has scaled back its offer and is now offering 0.593 share, which values Ashanti at about US$5.95. Ashanti now appears to be scouting other offers, with the backing of the Ghanaian government, which owns a 20% stake.

The government has also distanced itself from earlier statements by Mines and Energy Minister Fred Ohene-Kena that it supported the Lonmin bid. Ohene-Kena fell on his sword after the cabinet demurred, and was replaced by Ekwow Spio-Garbrah, who has been in touch with Prince Alwaleed bin Talal of Saudi Arabia about a bailout package underwritten by the Prince. A statement from Alwaleed’s company, Kingdom Holdings, says only that the company was consulting with the Ghanaian government on an investment in the gold producer.

Ashanti’s board has not mentioned any discussions with other possible suitors, which might include Anglo American (AAUK-Q), Anglogold (AU-N) and Barrick Gold (ABX-T).

Anglogold is on the acquisition trail, having just reached a buyout agreement with Australian producer Acacia Resources, and is active in West Africa. Barrick recently announced plans to put the Bulyanhulu gold project in northern Tanzania into production and is rumoured to be interested in Ashanti’s Geita project, in the same camp.

Meanwhile, Cambior (CBJ-T), which has been the principal focus of concern among Canadian gold producers, is in discussions with its hedging counterparties. The company is seeking ways to defer gold delivery obligations it entered into using both paired put and call options and “naked” calls.

Cambior had written call options on a total of 921,000 oz., all of which are scheduled to expire before the end of 1999, at an average strike price of US$287 per oz. A further 299,000 oz. was covered by options expiring in 2000, at an average price of US$323. The company is now seeking to draw out the deadlines for delivery on those calls, which, at presstime, represented a negative value of around US$18 million.

Cambior also wants to reschedule delivery on another 1.6 million oz. deliverable under spot-deferred contracts and under call options that are balanced by put options. The counterparties to Cambior’s hedges — most of whom are also lenders providing the company’s credit line — are being asked for a standstill agreement, and are expected to require Cambior to put up its operations as security for interim financing, and to stop paying dividends.

Third-quarter production at Cambior’s mines ran to 150,200 oz. gold, with costs estimated at US$217 per oz. In the first nine months of 1999, the company has produced 463,000 oz. at an average US$219.

Homestake Mining (HM-N) announced it has forward sales contracts and put options for just over 57,000 oz. maturing in 1999. It has written a total of 175,000 oz. in call options, at an average price of US$265 per oz., which expire in 2000 and 2001, but these are more than balanced by puts.

Homestake says it closed out 245,000 oz. in forward sales in late July, realizing US$35 million on the deal.

Similarly, Viceroy Resource (VOY-T) cleared the decks in late June, liquidating its hedge position for US$33 million and replacing it with put options and spot-deferred contracts. Of those, only spot-deferred obligations for 85,000 oz. remain, representing 40% of Viceroy’s production to the end of 2000. Viceroy has said it will not hedge any production from the Illinois Creek project in Alaska, which is undergoing a feasibility study.

Kinross Gold (K-T), which released its third-quarter earnings this week, has a relatively small hedge position, with 1.1 millon oz. hedged over a 6-year stretch. Only 200,000 oz. is in forward contracts expiring in 1999, but the company also sold calls on 200,000 oz. at an average of US$283. Kinross has not put any of the position on margin.

Production in 2000 is mainly unhedged, with 350,000 oz. sold forward at an average of US$305.

The hedge books are still in the black at Normandy Mining (NDY-T), which uses only forward sales and puts.

Meanwhile, some confirmed non-hedgers are responding to the new strength in the market by increasing production. Franco-Nevada Mining (fn-t) announced plans to scale up production at its Ken Snyder mine in Nevada. The Snyder mill, which currently crunches 590 tonnes of ore daily, will be expanded to a 900-tonne capacity.

Franco has budgeted US$2 million, part of which will be spent on upgrades to the crusher, the thickener and the Merrill-Crowe precipitation circuit. The rest will be used to build a new “verti-mill” grinding circuit that will process 320 tonnes per day, operating in conjunction with the existing mill.

The Snyder mine, which produced 54,846 oz. gold and 543,716 oz. silver in the quarter ended June 30, will be able to increase production to about 300,000 oz. gold and 3 million oz. silver from the present 200,000 oz. gold and 2 million oz. silver.