Gold hedging activity by gold mines has reached to a decade low level in quarter ended September 2013, according to latest quarterly Global Hedge Book Analysis by Societe Generale Thomson Reuters GFMS.
World over gold mining companies hedge their future production in derivatives market generally in options to lock their earnings and when prices fall the hedging activities also take a knock. “At end-September, the outstanding global hedge book stood at 2.94 Moz (92 t), the lowest volume since our quarterly series began in 2002,” said the analysis report released by the Thomson Reuters GFMS.
Mines have either allowed hedges to mature as scheduled or proactively to close out contracts for a profit and use the proceeds to pay down debt. “To date, fresh hedging in this lower price environment has remained comparatively modest,” said Cameron Alexander, Manager, Precious Metals Demand, Asia, GFMS Thomson Reuters in an email response to business standard query on hedge positions of mines.
Generally gold producers/mines refrain from hedging when they feel prices will fall further and in the rising [rice scenario they lock upper value by doing hedging. In the last phase of bull run many mnes who had sold or hedged future production had cut their position which is known as dehedging which further pushed prices. However a sudden crash in gold prices in april, 2013 tempted miners not to hedge when in September quarter prices averaged $1326 per ounce. However in subsequent months prices corrected further putting pressure on many mines as prices started trading below many of their cost of mining. GFMS global average gold mining cost including all corporate expenses is $1350 an ounce and even after considering write downs global average cost comes to $1200.
As reflected in the hedge book analysis, state of gold mining is not good. According to the hedge book analysis report, an industry wide cost containment effort has begun. Producers have cut back on non-essential capital expenditure, instituted wage freezes, cut corporate overheads and where possible, optimized mine plans for higher throughput and higher grade ore processing, leading to reduced mine lives. Furthermore, some of the larger multi-asset producers have already divested some of their higher cost mines and begun mine closures, which will afford these producers a certain degree of flexibility in this price environment. For non-cash generative juniors, it is likely that project finance will remain difficult to arrange.
While mines absence in hedging market would have given rise a belief that gold prices have bottomed out but that could be temporary as many of them may soon start looking at fresh hedging to lock current prices.
Cameron says, “If however, we start to gold prices wane further we believe this will lead to a growing willingness to hedge, and we therefore expect a return to net hedging this year, with larger-scale hedging activity in 2015 and 2016. Pressure may come from share holders to protect revenue streams in a declining price environment.”
The crisis began in mining industry doesn’t seem to be ending soon. Mines cutting down production (to cut losses when prices are lower and not covering costs) could support prices but that will depend upon whether demand contraction is lower than cut in production.
Cameron said, “mine supply is expected to edge lower this year before decreasing more rapidly in 2015 and 2016. Over 2014, a number of new operations will largely compensate for scheduled decreases in output from ageing mines elsewhere, as well as the supply lost due to the small number of operations closed so far on account of unsustainably high costs. However, from 2015 onwards, we expect to see more widespread closures or suspensions, as the declining gold price cuts more deeply into the cost curve for a sustained period.”
World over gold mining companies hedge their future production in derivatives market generally in options to lock their earnings and when prices fall the hedging activities also take a knock. “At end-September, the outstanding global hedge book stood at 2.94 Moz (92 t), the lowest volume since our quarterly series began in 2002,” said the analysis report released by the Thomson Reuters GFMS.
Mines have either allowed hedges to mature as scheduled or proactively to close out contracts for a profit and use the proceeds to pay down debt. “To date, fresh hedging in this lower price environment has remained comparatively modest,” said Cameron Alexander, Manager, Precious Metals Demand, Asia, GFMS Thomson Reuters in an email response to business standard query on hedge positions of mines.
Generally gold producers/mines refrain from hedging when they feel prices will fall further and in the rising [rice scenario they lock upper value by doing hedging. In the last phase of bull run many mnes who had sold or hedged future production had cut their position which is known as dehedging which further pushed prices. However a sudden crash in gold prices in april, 2013 tempted miners not to hedge when in September quarter prices averaged $1326 per ounce. However in subsequent months prices corrected further putting pressure on many mines as prices started trading below many of their cost of mining. GFMS global average gold mining cost including all corporate expenses is $1350 an ounce and even after considering write downs global average cost comes to $1200.
As reflected in the hedge book analysis, state of gold mining is not good. According to the hedge book analysis report, an industry wide cost containment effort has begun. Producers have cut back on non-essential capital expenditure, instituted wage freezes, cut corporate overheads and where possible, optimized mine plans for higher throughput and higher grade ore processing, leading to reduced mine lives. Furthermore, some of the larger multi-asset producers have already divested some of their higher cost mines and begun mine closures, which will afford these producers a certain degree of flexibility in this price environment. For non-cash generative juniors, it is likely that project finance will remain difficult to arrange.
While mines absence in hedging market would have given rise a belief that gold prices have bottomed out but that could be temporary as many of them may soon start looking at fresh hedging to lock current prices.
Cameron says, “If however, we start to gold prices wane further we believe this will lead to a growing willingness to hedge, and we therefore expect a return to net hedging this year, with larger-scale hedging activity in 2015 and 2016. Pressure may come from share holders to protect revenue streams in a declining price environment.”
The crisis began in mining industry doesn’t seem to be ending soon. Mines cutting down production (to cut losses when prices are lower and not covering costs) could support prices but that will depend upon whether demand contraction is lower than cut in production.
Cameron said, “mine supply is expected to edge lower this year before decreasing more rapidly in 2015 and 2016. Over 2014, a number of new operations will largely compensate for scheduled decreases in output from ageing mines elsewhere, as well as the supply lost due to the small number of operations closed so far on account of unsustainably high costs. However, from 2015 onwards, we expect to see more widespread closures or suspensions, as the declining gold price cuts more deeply into the cost curve for a sustained period.”
Source : Business-Standard.com
