Gold miners turning to derivatives to lock in revenue
The lower gold price is creating future risk among gold mining companies unsure of whether the price could fall further. That has them exploring new ways to lock in revenue, including the prospect of derivatives as hedging vehicles.
According to data from Societe Generale and Thomson Reuters GFMS, options structures comprised 46 percent of the global hedge book by the end of the first quarter, compared to only 16 percent during the first quarter of 2014 and 11 percent in Q1 2013.
Hedging is the most common means of protecting incomes during volatile periods for the gold price, but gold miners that hedged got burnt during the 12-year gold bull run between 1999 and 2011. Those that hedged found themselves frozen out of price increases they could have benefited from, had they not locked in at a lower price.
The global hedge book at the end of March stood at just 6.2 million ounces, from 57.2 million ounces 10 years ago.
Reporting on the trend of increased derivatives, Reuters notes that "options allow miners to put together more complex structures like zero-cost collars to protect revenues."
"With options, if you just bought puts, you're paying money for them, but you might be able to cover that by selling calls some way above the market, and giving up some of the upside above that," the news outlet quotes Mitsui Precious Metals analyst David Jollie as saying. Polyus Gold and OceanaGold are among gold companies that have used collars recently.