Small and medium-sized miners: It's time to dust off your hedge book

For the past seven years or so, as equity investors who wanted maximum exposure to the mining sector have gained the upper hand at the expense of bondholders, hedging in the industry – even at gold miners – had all but ceased.

The Financial Times (sub required) on Wednesday argues now that the supercycle in commodities is levelling off the balance of power will once again shift to bond investors who "approve of hedging because locking in prices guarantees future cash flows and, thus, the repayment of the principal of the debt":

Commodities bankers say that so far the shift in power from equity to bondholders has not been intense enough to force miners to return to hedging, but some industry veterans say that a hedging U-turn is in the making.

The shift is unlikely to affect the Big Five – BHP BillitonValeRio TintoAnglo American and Xstrata – which have multiple options to tap liquidity.

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But 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 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.

MINING.com 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.

It’s not the re-emergence of mining on the Iberian peninsula nor the comeback of an iconic mining complex that makes EMED’s Rio Tinto copper project so significant.

What really points to a momentous shift in the copper industry is an unconventional deal the London and Toronto-listed firm inked with investment bankers Goldman Sachs.

Continue reading Return to the Rio Tinto