Gold Digger: Bullish? Aussie gold producers are adding hedges as high as $3200/oz
Link copied to
Our Gold Digger column wraps all the news driving ASX stocks with exposure to precious metals.
It looks like some smart money thinks gold will go higher, with miners like Northern Star (ASX:NST), Silver Lake Resources (ASX:SLR) and Ramelius Resources (ASX:RMS) now adding hedges at well over record prices.
Gold producer hedges are a way for miners to manage risk.
Hedging involves a gold producer forward selling a portion of future gold production at a fixed price to lock in guaranteed revenue, rather than taking its chances with the spot price if it falls.
Some new producers do it as part of project financing. Capricorn Metals (ASX:CMM), for example, had 148,000oz of flat forward contracts remaining at an average delivery price of $2,260/oz at the end of the March quarter. This was part of the original hedging program required under the project financing facility for the Karlawinda gold project (KGP).
But in the latest round of quarterlies established producers NST, SLR and RMS spoke of adding record price hedges to their respective books.
“The additions … in the quarter were well over $3000 an ounce and if you compared our hedge book against every bank’s forecast, they’ve all got gold price coming off and we’ve got gold price going up,” NST boss Stuart Tonkin says.
“So something’s different there, but I’m confident that our policies work well for us today.
“We’ve still got over 75-80% of our production delivering into spot so it’s working well for us.”
Meanwhile, RMS is signing contracts on hedges as high as $3200/oz.
“The A$ gold price performed exceptionally well over the quarter pushing close to A$3,000 per ounce representing a 10% increase on the closing gold price on 31 December 2022,” it says.
“Ramelius took advantage of these gold prices, and the forward curve being in contango, by adding a net 20,000 ounces to the hedge book.
“The average price added to the hedge book over the quarter was A$2,911 per ounce with the highest contract being more than A$3,200 per ounce.”
SLR also hedged a substantial 60,000oz at A$3,145/oz for delivery in 2025 “to capitalise on the prevailing gold price and de-risk the cash returns of the planned investment in the Santa open pit and other potential open pits in the Mount Belches area”.
There’s nothing wrong with a dabble, but heavy hedging is a vestige of times past.
Why? Because when prices are going up – like now – you can lose money.
And when it goes bad, it goes really bad.
This happened during the Peak Hedge Epoch of 1995-1999, when gold prices were suffering due to the dotcom boom.
At the time, Central Banks were offloading their reserves, buying into the bulls..t that pets.com was the future and gold was an ‘ancient relic’. Gold producers attempted to stem the bleeding by hedging.
“To demonstrate the scale of the super-sized hedging, in 1999, 3,091 tonnes (99.3 million ounces) were hedged, compared to global gold mine production of 2,602 tonnes (83.6 million ounces),” VanEck portfolio manager and sStrategist Joe Foster writes in a 2018 note.
“As usually happens when anything is taken to excess, a crash soon followed.”
Gold prices unexpectedly spiked and some goldies, like 1.7Mozpa African producer Ashanti, were caught with their pants down.
“A significant portion of the book was locked into prices below $325, as Ashanti failed to anticipate such a rise in gold prices,” Foster writes.
“When the price rose, the value of the book fell to negative $570 million.
“This brought margin calls from the banks that totalled $270 million. However, the company did not have the liquidity to post margin.
“It was effectively bankrupt.”
The Ashanti crash “scared the daylights out of every gold company CFO with a hedge book”, resulting in the huge decline in hedging which has continued to the present day.
Still, you get the odd outlier. Regis Resources (ASX:RRL) continues to have 145,000oz of legacy hedges in the book as of March 31 at a frighteningly low price of $1571/oz.
RRL has $204m in the bank and managed to generate $99m in operating cash in the March quarter, despite torching $29m in hedge losses.
For years, RRL has been frantically working down a massive hedging position which easily surpassed 400,000oz in 2019 at an average delivery price of A$1,592 per ounce.
A$1600/oz didn’t look too bad four years ago. It does now.
Here’s how ASX-listed precious metals stocks are performing:
Scroll or swipe to reveal table. Click headings to sort. Best viewed on a laptop.
Stocks missing from this list? Email [email protected]