Getting back into the hedge
SA gold-mining companies are taking risk-mitigation steps at a time of flat gold prices and operating uncertainty
Limited hedging activities are creeping back into the gold sector, but miners are taking a more cautious position than they did 15 years ago.
In the early 2000s, after a lengthy period of depressed gold prices, producers — including Barrick Gold and Anglogold Ashanti — sold forward a significant portion of future production at prices that turned out to be overly pessimistic. As a result, their shareholders missed some of the upside when gold prices surged and the two miners had to buy back their hedge books at great cost.
In the past decade, gold hedging across global producers has been minimal.
The latest financial reports from three of SA’S biggest producers —
Anglogold, Harmony Gold and
Gold Fields — show that while
Anglogold is still unhedged, Harmony and Gold Fields have been hedging certain risks, such as currency, oil and gold prices, for short periods. Pan African started shortterm hedging for part of Barberton
Mines’ production in mid-2015.
Old Mutual Equities investment professional Meryl Pick says she does not interpret these moves as producers taking a view on the gold price.
“For the most part it was either opportunistic hedging of currency or oil prices, or short-term hedging of the local gold price in regions where they are spending increased amounts of capex and having to take on debt.”
Harmony’s gold hedging
Gold Fields has taken hedges against the oil price and the Australian dollar gold price to protect its cash at a time of significant expenditure on its Australian assets. It has hedged
165,000 oz at a floor of A$1,696/oz and a cap of A$1,745/oz from July to December this year; and 130,000 oz at an average A$1,720/oz for the same period. Gold is currently about
A$1,630/oz. The gold hedge represents about 70% of Gold Fields’ expected production from the Australian region in this six months.
Gold Fields has also hedged about 70% of its August-december 2017 copper production at a floor of $5,867/t and a cap of $6,300/t. The London Metals Exchange cash copper price is about $6,714/t.
Harmony declared a final dividend of 35c/share, taking the full-year dividend to 85c, while Gold Fields declared an interim dividend of 40c/share. Anglogold passed an interim dividend after posting a headline loss of Us22c/share for the six months to June and setting aside $47m for retrenchment provisions for the restructuring of its SA operations. About 8,500 jobs are at risk.
The total provision made by Anglogold, Harmony, Gold Fields and Sibanye Gold for a silicosis legacy fund in their latest reports is about R3bn, though some have provided a pretax figure and others an after-tax figure.
The provisions may help to address an uncertainty that has lingered over SA gold miners for the past six years. In 2011 a constitutional court settlement in the case of Thembekile Mankayi set the ball rolling for lawyers to begin a class action to sue mining companies for silicosis and tuberculosis incurred by tens of thousands of workers on their mines over decades.
Sibanye says members of the Gold Working Group (Harmony, Gold Fields, Sibanye, Anglogold, Anglo American and African Rainbow Minerals) do not believe they are liable and are defending the claims, which have not yet been quantified.
“They do, however, believe that they should work together to seek a solution to this SA mining industry legacy issue,” it says.
BMI Research says after several years of austerity, global gold miners are expected to resume spending this year on acquisitions and expansions. But it expects those operating in sub-saharan Africa to face elevated costs because of regulatory uncertainty, power shortages and labour unrest.