GFMS says gold hedging is a peripheral issue. Others not so sure

Gold producers continued to reduce hedging in the first quarter of 2012, contracting their books by 0.08 million ounces, or 3 tonnes, according to GFMS and Société Générale's Global Hedge Book Analysis released Thursday.

This brought the outstanding producer hedge book at end-March to 5.07 million ounces, or 158 tonnes, down from a revised end-2012 figure of 5.15 million ounces, or 160 tonnes.

In total, seven companies increased their hedge positions, while 33 companies saw their hedge positions reduce. GFMS said this was not due to active de-hedging, but rather due to option contracts maturing and ongoing delivery into forward sales.

GFMS-SocGen said much of the quarter’s activity came from a handful of producers and was mostly project finance related.

Among those who entered forward sales agreements were Millennium Minerals (+98.7 koz, 3 t), Straits Resources (+68.7 koz, 2 t), Yukon Nevada Gold (+28.0 koz, 1 t), Aura Minerals (+22.5 koz, 1 t) with small hedges seen from Orvana Minerals and American bonanza Gold. Platinum producer Lonmin also added 70.7 koz.

Despite the reduction in the size of the book, the increase in the end-quarter gold price of $88/oz added $0.28 billion to the aggregate marked-to-market liability of producers bringing it to negative $1.52 billion in the quarter.

The report predicts ongoing rates of delivery into the hedge book, plus the maturity of options positions during the year, which should be balanced somewhat by ongoing project-related hedging.

Moderate net hedging is expected for the full year, but GFMS-SocGen stressed that it did not mean a shift in management attitude towards hedging. Most producers are still bullish about price expectation as are the authors of the report.

GFMS-SocGen concludes that in contrast to other drivers of the market, for example fabrication demand, investor demand or scrap supply, they expect the impact of hedging/de-hedging in 2012 to continue to be on the periphery, rather than an important price driver/support.

Other observers believe hedging in the broader mining sector is making a comeback.

Now that the supercycle in commodities is levelling off "medium- and small-size miners listed in London, Toronto, Johannesburg and Sydney could soon feel the pressure from bondholders to lock in prices to secure cash flows – particularly in commodities whose prices are still well above marginal costs, such as copper and iron ore," the FT commented this week.

The expansion of exchange traded funds from precious metals into other commodities and metals has also allowed for novel financing models to arrive – sans the price hedging. argued in May if there is one mining project anywhere in the world that could warrant the old Hollywood blockbuster title of Back to the Future it must be EMED Mining’s Rio Tinto copper venture in Andalucía thanks to an unconventional deal the London and Toronto-listed firm inked with investment bankers Goldman Sachs.