LITERATURE REVIEW — Hedging gains reduce Pegasus’ losses

Low prices present challenges for any gold producer, but companies with low-grade operations are often hardest-hit by weakening prices for the precious yellow metal.

Pegasus Gold (PGU-T), which operates a number of low-grade gold mines in the western U.S. and elsewhere, has had to pay close attention to its bottom line during periods of low gold prices. Part of that effort involves hedging production, and, during the latest quarter ended June 30, the company was able to realize an average gold price of US$444, compared with the average spot price of US$343.

“The company’s successful hedging program enabled [us] to realize US$101 per oz. above the average spot price in the quarter, even as the gold price continues to weaken,” states Werner Nennecker, president. “Going forward, the company will continue to focus its efforts on reducing costs at all levels in light of the current weak gold market.”

For the first six months of this year, the company’s average realized gold price was US$451 per oz., compared with the spot price of US$348.

At the end of June, Pegasus had price protection on 897,000 oz. of future gold production with an average price of US$436 per oz., including forward contracts in place to deliver nearly all of its remaining 1997 gold production at an average price of US$435 per oz.

Despite the impressive hedging gains, Pegasus reported a net loss of US$3.2 million in the second quarter, compared with a net loss of US$1.7 million a year earlier. Total gold production for the second quarter was 92,800 oz., bringing year-to-date gold production to 180,300 oz. Second-quarter production in 1996 was 115,500.

The production decrease is attributable to two factors: both Mt. Todd (Australia) and Zortman (Montana) continued to produce only residual heap-leach ounces; and Beal Mountain (Montana) and Black Pine (Idaho) mined fewer tonnes than in the last year.

Total cash costs averaged US$295 in the second quarter, compared with US$298 a year earlier.