Gold producer hedging drops to record lows

Gold hedging plunged by another 18% in the first quarter of 2008, shrinking the global delta-adjusted hedge positions to 22 million troy ounces (Moz).

A total of 36 companies made hedge reductions in the first quarter, with the bulk of dehedging coming from four companies, who accounted for 4 Moz of the 4.8 Moz decline, according to VM Group, a London-based research company.

The latest cuts were mainly in forwards contracts – net forwards contracts shrunk by 22%, to 14.1 Moz at the end of the first quarter. Call options also suffered cuts, with net call options sold reduced by 0.5 Moz, and net puts by 0.3 Moz.

Gold producers have been systematically dehedging their gold over the past few years, bowing to pressure from their shareholders to allow them to participate in the metal’s rising price. The price of gold has been in contango since April 2001, when it started to recover from a protracted period of price weakness. Gold prices have almost tripled over the past eight years, rising 256% from $283.90 per ounce on March 17, 2000, to a record $1011.25 on the same date this year, the highest it has been in history.

Heading the cuts in the last quarter was AngloGold Ashanti, which reduced its committed ounces by 1.2 Moz. The miner dehedged by delivering into maturing contracts and buying back earlier commitments. These cuts were only on its 2008 hedge commitments, and mostly in the dollar-denominated forwards and calls sold.

AngloGold Ashanti has also announced a rights issue of $1.6 billion, to help it cover the costs of cutting another 3.8 Moz from its hedged positions later this year.

Barrick Gold also continued with its dehedging programme, converting 1.14 Moz of fixed-price contracts into floating price contracts, sold at a strike price of the spot gold price less $482 per ounce. The miner now has 2.84 Moz of floating rate contracts and 6.66 Moz of fixed-price contracts.

Buenaventura closed out its entire hedge book, cutting 0.14 Moz of 2010 forwards at a cost of $82.6 million on January 24 and 0.78 Moz of 2010-2012 forwards at a cost of $351 million on February 6.

Newcrest also removed 0.7 Moz from its hedge positions and now only has 0.2 Moz of hedge commitments.

Only two companies added to their hedge commitments and then with an amount of just 0.7 Moz - Alamos Gold and Dominion Mining, according to VM Group.

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