Thursday, February 23, 2006


Major Miners Back Away From Hedging

Reuters reports on hedging among gold miners. "Big gold companies, under investor pressure, continue to shun hedging but small firms are being forced to sell forward to cover the high risk of their projects, analysts say. The total of global hedging is seen shrinking, albeit at a slower pace, as the rate of project hedging, selling gold in advance at fixed prices, would make little impact on the dehedging by industry heavyweights, they said."

"'The companies have publicly committed to reduce their hedge books, not to increase them, so I don't expect them to start hedging again in the same way in the near future,' Jeremy East, global head of precious metals at Commerzbank, said on Thursday."

"As gold trades near 25-year highs, firms may be tempted to lock in prices at today's much higher levels. But stiff resistance from investors, reluctant to see a cap on potential gains, combined with anti-hedging rhetoric by major producers, have limited the scope. 'It will take a change in approach by the major gold mining companies before we see a material change in the whole de-hedging phenomenon,' said John Levin, head of marketing at Mitsui Global Precious Metals. 'At this stage, while the pace of de-hedging is slowing, there is no sign of a return to hedging by the majors.'"

"The net outstanding position in the global hedge book fell to 1,666 tonnes by the end of 2005 from 1,804 tonnes in 2004, and is seen dropping further to 1,428 tonnes by December. Two-thirds of the hedge book is controlled by big companies like Barrick Gold, AngloGold Ashanti, Placer Dome Inc. and Newcrest."

"In the face of the overall trend toward de-hedging, the last quarter of 2005 saw a rise in overall hedging, coming from small producers. Analysts say that banks, interested in protecting their investments in small but costly projects, are forcing the producers to hedge."

"'You have new projects which are interesting but they are only interesting because of the high gold price,' said Wolfgang Wrzesniok-Rossbach, head of precious metals marketing at Germany's Heraeus. 'Therefore banks are enforcing hedging which makes sense because they need to protect their credit,' he added."

"'Hedge books are essentially insurance against falling gold prices, so are less valuable the higher the price of gold goes,' a Mitsui report on dehedging said. 'There is still a negative stigma associated with hedging,' said Yingxi Yu, analyst at Barclays Capital."

"Barrick Gold remains committed to reduce its forward sales. It holds the biggest hedge book in the industry following its $10.4 billion takeover of Placer, totaling 21 million ounces. 'We are certainly not planning to add any hedges,' Alex Davidson, executive vice president, exploration and development, told Reuters this month. 'The market will forgive a midcap for hedging if a bank requires it to get financing, but if you hedge as a revenue enhancement strategy, the markets aren't so keen about that.'"

"AngloGold said it did not expect to resume most hedging for at least a couple of years. Marketing Director Kelvin Williams said this was due to its bullish view of gold prices."

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