Gold Fields hedges gold to shield Gruyere
In a remarkable U-turn on an anti-hedging sentiment often espoused by its CEO, Nick Holland, Gold Fields is selling three-quarters of its Australian gold output forward for the next six months to protect its large capital expenditure Gruyere project in the country.
Gold Fields has also locked in prices for its oil prices in Australia and Ghana, where it faces expenditure of A $250m and $340m respectively on the Gruyere mine and work to expand its Damang open pit mine.
Holland has been an outspoken critic of hedging gold production, often pointing out when asked about the company locking in gold prices that the long-term spot price always beats prices in a hedging contract.
“We maintain our view that we will not enter into long-term systematic gold hedging,” the company said in response to a question on whether this was a change in strategy.
Gold Fields had little choice when it came to locking in the gold price for a limited time to ensure it could complete the project in Australia, the largest source of gold for the group, said an analyst.
“Holland has no option. His free cash flows are going into negative territory, so hedging while he spends big cash amounts on new developments such as Gruyere and the Damang pit cutback is good risk management,” said the analyst who cannot be named for company policy reasons.
“Gold Fields has done a great job getting its debt load down and they simply don’t want to see that increasing sharply again. It is only for six months and the production from these new assets will provide a nice ‘kick’ in 2019 — more production at better margin,” said the analyst.
The gold hedge is for 165,000oz at a floor price of $1,695.86/oz and a cap of $1,754.18/oz between July and December, while another 130,000oz has been sold forward at an average price of $1,719.92/oz for that period.
The 295,000oz represents three quarters of its Australian gold output for the six months.
The gold price in Australia is A$1,650/oz.
To lock in oil prices and protect its cost margins in Australia and Ghana, Gold Fields has secured contracts to buy half the fuel it needs in both countries at fixed prices from now to the end of 2019. It has bought 78million litres of diesel at a price
A $250m the expenditure Gold Fields faces on the Gruyere mine in Australia
equivalent to $49.92 a barrel of Brent Crude for its Australian operations and 126-million litres of diesel for its Damang and Tarkwa open cast mines in Ghana at a price of $49.80 per barrel.
Harmony Gold, another South African company that for a long time has said it would not hedge, leapt at the chance to lock in gold prices well above prevailing levels, taking advantage of a weakening of the rand against the dollar.
It locked in gold prices for a fifth of its annual gold output for two years at an average price of R682,000/kg.
The rand gold price is just below R523,000/kg, giving Harmony’s balance sheet a valuable boost as it moves ahead with its Golpu copper and gold project in Papua New Guinea.