Conference focuses on hedging

With gold prices bouncing off 20-year lows, the hedging strategies of the world’s major producers were front and centre at the Denver Gold Group’s Mining Investment Forum held here in mid-October. Delegates were willing to endorse hedging, but not hedging badly, which can turn healthy profits into big losses overnight.

Hedging has always had its proponents and critics. Some see it as a prudent policy to mitigate low prices, even at the risk of placing a ceiling on future price increases. Others fear its potential to turn into a liability if a hedge book is managed incorrectly, or if prices suddenly turn against the hedger.

The debate over hedging comes on the heels of problems experienced by Ashanti Goldfields (ASL-N) and Cambior (CBJ-T), both of which have bankers poring over their hedge books. Margin calls on Ashanti’s hedge book turned a progressive position into a paper loss of US$450 million after the price of gold shot up US$60 to above US$300 per oz. in early October. Counterparty creditors have since agreed to a standstill agreement, giving the company breathing room.

Ashanti did not attend the annual meeting of senior gold producers, opting instead to address its hedging problems, as well as a possible takeover by Britain’s Lonmin. Other major producers, including Barrick Gold (ABX-T), are rumoured to be interested in Ashanti’s assets.

Cambior bravely chose to present at the Forum and was rewarded by a large turnout of delegates. Analysts peppered President Louis Gignac with requests for more details concerning the company’s hedgebook, inquiries that were in most cases turned away with references to previously published information.

Cambior’s hedgebook has 2.7 million oz. sold forward over the next eight years. The company’s problem is a block of call options on 1.9 million oz. over the next three years, including options on 921,000 oz. expiring at the end of the year at US$287 per oz. Realization of this transaction when gold was making 2-year highs could have cost Cambior as much as US$40 million.

Gignac said Cambior is not in a position to eliminate its hedge position, though he hopes to improve it. In the meantime, the company expects to conserve resources and limit exploration in 2000, earmarking US$6 million to maintain property payments. The crunch has left analysts publicly speculating about which assets Cambior might need to sell, or if the company could weather the current trouble.

Other companies put positive spins on their hedging policies, ranging from pro-hedging companies, such as Australia’s Sons of Gwalia and Barrick, to the unhedged Franco-Nevada Mining (FN-T) and hedging dilettante Newmont Mining (NEM-N).

Peter Lalor, managing director of Sons of Gwalia, was unapologetic about hedging. His company has maintained a strong policy for more than a decade, and expects to receive around US$430 per oz. in fiscal 2000. Its book consists of 3.1 million oz. in put options, and smaller amounts of forward sales. However, the company has locked in lease rates through June of next year, wrote no calls, and is not on margin.

Barrick’s chief executive officer, Randall Oliphant, distanced his company from Ashanti and Cambior, saying, “Not all hedgebooks are the same.” His company has earned US$1.5 billion from hedging over the past 12 years, and never failed to reach its market forecasts.

“As for the impact of rising gold prices on our mark-to-market position,” Oliphant added. “Who cares? We are not a trading company. We are a gold producer earning interest on our gold while it is still in the ground. While our mark-to-market has declined, it has never been a relevant issue, because our realized price remains the same. And as gold prices rise, so does the value of our company, because three-quarters of our reserves are unhedged.”

But not all of the presenters were unanimous about hedging. Echo Bay Mines Chairman Robert Leclerc welcomed a chance for supply and demand to set the price of gold again now that lease rates are higher and producers are reluctant to make any new forward positions.

Several companies remain bullish on gold, expecting it to continue rising, even though the price lost US$9 per oz. during the 3-day conference. Franco-Nevada’s chairman, Seymour Schulich, foresees gold rising above US$400 per oz. as a further result of the European Central Bank’s decision to limit gold sales, which locks nearly 85% of the world’s gold holdings out of the market for the next five years.

That decision would not have been possible without the work of the World Gold Council, said Newmont Chairman Ronald Cambre. Anglogold’s executive director, Kelvin Williams, echoed Cambre’s support of the organization, challenging other non-member producers, which dump more than 2,500 tonnes of gold on the market each year, to take a more active role in marketing their product.