World's Top Gold Producers Closing Out Forward Sales

Gold producers are finally genuflecting to investor interests to rid themselves of legacy hedge positions as gold's rally enters its seventh year.
St. LOUIS (ResourceInvestor.com) -- Despite prior forecasts of a slowdown in dehedging this year, Mitsui Global Precious Metals reported quite the opposite today with gold hedging falling by an estimated 3.9 million ounces to 36.7 million ounces in Q1. The world’s top gold producers led the way.

“This cut of almost 10% was the 20th successive quarterly reduction, and means that gold hedging worldwide is now 64% lower than it was at its peak in Q3 2001 (118 million ounces),” the report noted.
In 2006, dehedging hit 13.4 million ounces - 9 million ounces greater than in 2005 and the largest annual reduction in the global hedge book at 25% since records begin in 2002.
This year, Mitsui forecasts dehedging is likely to be between 8-11 million ounces, lower than last year’s but an increase from the earlier estimate for 2007 of 7.8 million ounces.
Gold producers have been rapidly unwinding forward sales contracts as gold’s rally enters its seventh year, translating into decreased gold supply or a rise in demand in the market.

This quarter, Barrick Gold [NYSE:ABX; TSX:ABX] once again led the decline, reducing its hedge position by 1.3 million ounces, and consequently, reported its first quarterly loss in five years of $159 million, or $0.18 per share.
The company concluded forward sales in the amount of 10.5 million ounces in a little more than a year. Over the last 5 years, Barrick has eliminated over 22 million ounces of Barrick, Placer and Homestake hedges. The company eliminated Placer’s hedge position of 7.7 million ounces in about 15 months alone.

Edel Tully, Head of Precious Metals Research at Mitsui Global Precious Metals, said now that Barrick’s major dehedging programme has finished, a slowdown in the rate of dehedging is inevitable.
“However, other companies made large reductions in Q1 07, and with a few exceptions, opposition to hedging in the industry is such that we expect the global book will fall further,” he added.
The world’s third largest gold producer AngloGold Ashanti [NYSE:AU] cut its position by 600,000 ounces as part of its continued restructuring. AngloGold’s remaining hedge position is currently just over 9.5 million ounces, but scheduled for a 50% reduction by 2009.

In its quarterly results report today, the company said that it continues to actively manage its hedge position in a value-accretive manner, while actively reducing the overall position.
“While some new gold hedging is being undertaken by producers in association with debt financing obligations, it seems likely that producers will remain net dehedgers in 2007, which should be supportive of the gold price,” the company said.
AngloGold Ashanti reported adjusted headline earnings of $97 million, or 34 cents per share, for the first quarter of 2007.
Gold Fields [NYSE:GFI], the world’s number four gold producer, closed out the remaining 700,000 million ounces of the recently acquired Western Areas’ hedge book. Gold Fields’ profit decreased to $52 million or 8 cents per share this quarter, compared to $104 million or 20 cents during the previous quarter.
The company’s policy is to remain unhedged to the gold price in the future, even though hedges are sometimes undertaken on a project specific basis.

Buenaventura [NYSE:BVN], Peru’s largest publicly-traded precious metals company, sliced more than a quarter off its hedge book in the amount of 500,000 ounces in total. A further 800,000 ounces is scheduled to close by 2009, leaving just 700,000.

“We have seen some significant reductions already this year and it looks like producers are finally genuflecting to investor interests to rid themselves of these legacy hedge positions,” said Neal R. Ryan of Blanchard & Co.
Thirty-six other companies also cut their positions, collectively reducing the global hedge book by 1 million ounces.
“We expect to see some aggressive reductions moving through the remainder of the year,” said Ryan.
Five companies added new hedges, but only two of those saw increases larger than 100,000 ounces each: Etruscan Resources [TSX:EET] added nearly 250,000 ounces, while View Resources [ASX:VRE] added 175,000 ounces.
Looking ahead, Mitsui said that Lihir Gold [Nasdaq:LIHR] announced in April that it had closed out its 1.4 million hedge book three years early, which will be included in Q2.

Although Newmont, the world’s second largest gold producer, did not close out any hedges in Q1, about 1.8 million ounces of its 2-million-ounce hedge book will be concluded in the next three years.
“Basically, Newmont's hedge book is relatively small compared with their production, and it's never been an 'issue' with shareholders or analysts. So I expect they don't feel the need to always reduce it,” Matthew Turner, commodities analyst at Virtual Metals, told RI.
Barrick still has 9.5 million ounces of hedged gold to help finance its Pascua-Lama and Pueblo Viejo projects, which are required to be covered beginning in 2009.

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