Placer cuts hedge book (April 07, 2003)

Vancouver — North America’s third-largest gold company reduced its hedging program by 1.1 million oz. in the first quarter of 2003.

Placer Dome (PDG-T) converted 920,000 oz., which were committed under forward sales for 2004 through to 2006, into put options. It did so by purchasing offsetting call options at a cost of US$9.4 million, or about US$10 per oz.

At the end of March, the number of committed ounces was 11.5 million, or 22% of gold reserves, at an average realized price of US$380 per oz., giving Placer’s hedge program a positive mark-to-market value of US$113 million.

The company intends to reduce its hedge book to below 10 million oz. by the end of the year, marking a cumulative decrease in committed ounces of more than 20% for the year. Placer will not incur an opportunity cost on its hedge program in 2003 unless gold averages higher than US$375 per oz.

Hedging has been a part of Placer’s strategy since the early 1990s. The policy had generated a mark-to-market value of US$490 million by the end of 2001. Over the past 10 years, Placer posted operating earnings in excess of US$1 billion from forward-selling equating to a realized gold price consistently in excess of the spot price.

However, over the past 18 months as the price of bullion awakened from its long slumber, hedge books have come under closer market scrutiny.

Late last year, Placer picked up a significant gold hedge position through its take over of Australian miner AurionGold (90% of reserves, or 5.9 million oz., added to the hedge book). The major integrated the two books with an aim of achieving a combined hedging ratio of not more than 20% of mine reserves. Should the price of gold continue to rise, part of the hedge dilution will be achieved by converting resources to reserves.

Last year, Placer’s hedge program realized a US$32-per-oz. premium over the average spot price of US$310 per oz. This added US$82 million to corporate coffers. After integrating AurionGold’s hedge book, Placer saw its committed ounces rise to 12.6 million.