Hedging helps Harmony weather the forex storm

The sudden weakening of the rand against a basket of currencies as the Turkish lira took punishment presents opportunities for the SA mineral producers, with one in particular, Harmony Gold, showing a recent track record of well-timed activity.

Gold miners can use a financial instrument called a “hedge” — essentially agreeing to an upfront sale price of future production for delivery at set times.

Both parties are taking a bet on what the metal price will do. It’s a bet that can go badly wrong for the mining company and its investors. Given the general wariness around hedging, SA gold producers have generally avoided hedging, but in recent years Gold Fields has hedged gold and oil prices for capital intensive projects in Ghana and in Australia.

Harmony caught its investors by surprise in 2016, putting in place a hedge for 20% of its gold production for 24 months and putting in contracts for the rand exchange rate against the dollar, something that has enormously benefited its financials.

When the dollar price of gold increased and the rand weakened, pushing the local price of gold to above R600,000/kg, Harmony struck. It secured the inflows of one-fifth of its annual production, realising prices well above the prevailing price at the time. It was a smart move that allowed it to repay debt and fund the extension of the Hidden Valley mine in Papua New Guinea.

While Harmony declined to say whether it had taken advantage of the fresh weakness in the rand, pointing out that it is in a closed period, the company had already topped up its hedge positions once. The chance of it grabbing the first opportunity to do so again is highly likely.

With a mixed bag so far from Absa and Nedbank, the focus in the local banking sector has shifted to Standard Bank’s interims on Thursday and FirstRand, which is set to release its annuals soon.

FirstRand would like to improve on its 7% earnings growth at the half stage in December, while Standard wants to continue its good showing from last year. It grew headline earnings 14% in 2017.

Absa reported flat interims while Nedbank delivered a 27% rise in headline earnings.

The stakes are particularly high for Absa, as Nedbank is breathing down its neck in the market capitalisation race. Absa’s market cap currently is about R140bn with Nedbank close behind at R132bn.

Absa’s share price is down 12% for the year, while Nedbank has risen 1.1%.

Nedbank’s performance was off a low base, linked to an improved performance from Ecobank. Absa is ramping up its extension of credit after years of subdued numbers, now that the Barclays yoke has finally been lifted. With growth in home loans of 14%, and with vehicle financing rocketing 19%, the future looks bright for Absa, provided there is no increase in bad debts.

Some problems remain for the sector as a whole. The pool of bank customers is not really growing against a background of tepid economic growth and sky-high unemployment.

But local banks are moving in the right direction and there is hope for some recovery in the banking index in 2018. The index is down 6.6% for the year to date.