Hedging program proves profitable for Royal Oak

Vancouver-based Royal Oak Mines (TSE) has collapsed its gold hedging program in order to pay down long-term debt.

As of June 30, Royal Oak had hedged 100,000 oz. of gold at an average delivery date price of US$465 per oz.

“We took advantage of the low gold price to maximize our gain,” said Graham Eacott, manager of investor relations. “We felt that it was attractive because the lower the gold price the greater the gain is going to be.” During the last days of August, the spot price for gold on the London Metal Exchange dropped to as low as US$347 per oz. The precious metal recently recovered to US$350 per oz.

Hedging is a strategy used by gold producers to protect their revenues from fluctuations in the gold price. There are four main types of hedging: forward sales, gold loans, options and spot deferred contracts.

Eacott said proceeds of US$8.5 million will virtually eliminate Royal Oak’s long-term debt, which was $9.9 million on June 30.

He said the company was considering other hedging options for its 1992 production.