Placer cuts hedge book (April 01, 2003)

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

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

As of March 31, the major’s maximum committed oz. tallied 11.5 million, or 22% of gold reserves, at an average expected realized price of US$380 an oz. giving Placer’s hedge program a positive mark-to-market value of US$113 million.

The company aims 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 above US$375 oz.

Hedging has been a part of Placer’s strategy since the early 1990s. The policy had worked well generating a mark-to-market value of US$490 million by the end of 2001. Over the past ten years, Placer posted operating earnings in excess of US$1 billion from forward selling equating to a realised 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 come from 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.