Taking de-hedge off

The pace of quarterly de-hedging fell to its lowest level in more than two years with a modest 490,000-oz. (15.2-tonne) cut in the delta-adjusted hedge book in the 3-month quarter ended Dec. 31, 2005. This was one conclusion from the Global Hedge Book, compiled and published by London-based consultant Gold Fields Mineral Services (GFMS).

Combined with the 3.96 million-oz. (123-tonne) reduction in the nine months ended September 2005, the hedge-book reduction for all of 2005 amounted to a provisional 4.44 million oz. (138.2 tonnes). Excluding the modest 470,000-oz. (14.5-tonne) cut recorded in 2000, last year’s figure represents the smallest decline in hedging since the de-hedging cycle began.

GFMS senior analyst Bruce Alway says that the slowdown in de-hedging does not necessarily suggest a change in producer sentiment towards hedging. He says it’s worth noting that two-thirds of the global hedge book is controlled by AngloGold Ashanti, Barrick Gold (and now Placer Dome) and Newcrest Mining, which appear intent on reducing their respective hedging contracts rather than to committing to fresh ones.

From the junior producers, the December quarter witnessed an unusually high level of fresh hedging, most of which was related to new mines and development projects. Among the more significant hedges, there were additions from European Minerals, Equigold, Oceana Gold, Resolute Mining, Sino Gold and St. Barbara Mines. This group added a combined 1.09 million oz. (33.8 tonnes) of forward contracts, 200,000 oz. (6.3 tonnes) nominal net puts and 260,000 million oz. (8 tonnes) nominal net calls. “At an annualized rate of more than four million ounces (124.4 tonnes) of forward sales, it is not anticipated that project hedging can be sustained at these levels in 2006,” Alway stresses.

De-hedging in 2006, however, is expected to recover somewhat from last year’s near-record low, with early estimates of 7.66 million oz. (238 tonnes). That figure could change significantly if Barrick were to undertake a major restructure/buyback when it integrates Placer Dome’s hedge book into its own.

— The preceding is an edited version of an information bulletin published by London-based GFMS. It was originally prepared for South Africa’s Investec banking group.