Gold hedgers’ hesitation may cost them millions

Time is running out for gold mining companies that plan to hedge their 1992 production.

As of June 30, 1991, North American gold producers had sold forward only 29% of 1992 production at US$420, according to a survey by Nesbitt Research analyst Egizio Bianchini. By comparison, some 54% of North America’s estimated 1991 output has been hedged.

In order to match this year’s rate, gold miners will have to sell about three million oz. in the six months from June to December, Bianchini estimates. “Producers have nearly as much gold sold forward over the last half of 1991 as they do in all of 1992, at the same price per ounce,” he says. The analyst’s results are based on a survey of 67 gold producers, including 12 senior producers (greater than 400,000 oz. in 1992), 14 intermediate producers and 41 junior producers (less than 100,000 oz.). The companies use a combination of hedging strategies including forward sales, gold loans, options and the increasingly popular spot deferred contracts. Reluctance to sell forward in a depressed gold market has kept many normally active hedgers on the sidelines this year. During the first half, the spot price for gold averaged US$366 per oz., compared with US$383.47 for the whole of 1990.

Bianchini argues that producers missed their big chance to hedge in January, when gold prices were climbing in response to the Gulf crisis. Many producers were awaiting a sustained rally, but only a few, including International Corona (TSE) pounced on the window of opportunity that opened on January 15, when the spot price spiked briefly at US$403.

In terms of hedging opportunities, the remainder of the year looks bleak. According to a number of gold pundits, including the Bank Credit Analyst and Sanwa McCarthy Securities Ltd. analyst Jim Perrone, gold is likely to remain in the doldrums for the near term.

“The technical picture is no longer favorable with a moderate risk that prices will weaken below US$345,” says the Bank Credit Analyst in its September report. “A drop below US$345 would kill the prospects for a major rally and instead, would shift the risks of a major slide to the next major support level between US$280 and US$300.”

The spot price for gold dropped to US$343.50 on Sept. 13.

If the gloomy statistics prevail, gold producers will be unable to match last year’s forward selling contacts in either quantity or price. As a result, the industry’s profit margins, already under strain, are likely to shrink in the new year.

Most North American producers have come to rely on some degree of hedging to lock in profit. Those who haven’t, including Agnico-Eagle Mines (TSE) and Battle Mountain Gold (TSE), watched themselves slip into loss positions in 1990 as the gold price continued its decade-long decline.

By contrast, companies such as American Barrick Resources (TSE) and Cambior (TSE), both of which are almost fully hedged at more than US$420 this year, have managed to maintain strong earnings in a weak market.

“We favor companies that have a proven track record as aggressive and successful users of the forward markets,” says Bianchini. “Among these are American Barrick, LAC Minerals, Amax Gold and Cambior.”

Canadian companies that remain under hedged with respect to their 1991 position include International Corona (TSE), Teck (TSE) and Placer Dome (TSE). Hemlo Gold Mines’ (TSE) percentage of hedged gold production has dropped from 46.4% this year to 11% in 1992. Royal Oak Mines (TSE) recently collapsed its program in order to take advantage of the spread between current prices and contract prices.

Hedging Positions for Canadian producers

Est.1992 1992

Company 1991 1992 production price

(% hedged) (% hedged (oz.) (US$ per oz.)

as of June 30)

Amer Barrick 91.1 91.1 1,228,000 440

Cambior 74.1 97.2 289,000 414

LAC Minerals 81.8 85.1 475,002 386

BIG 96.3 60.9 685,000 389

Int Corona 49.1 30.7 618,000 397

Placer Dome 94.3 29.8 1,763,000 422

Echo Bay 7.9 14.0 837,000 436

Hemlo Gold 46.4 11.0 408,000 NA

Teck 22.2 9.2 430,000 NA

Agnico-Eagle 0.0 0.0 190,000 —