Just when some were beginning to warn about gold producers’ exposure to a fall in gold prices, because of their stubborn reluctance to re-start hedging programmes…
The price of a troy ounce of bullion does this:
And the preference, once again, is for gold producers to have completely unrestricted exposure to upside moves in gold.
That at least seems to be the case on Wednesday, with AngloGold Ashanti announcing it will be offering up to 18.1m new ordinary shares, as well as issuing convertible bonds, for the purpose of effectively eliminating its hedge book. It’s a move which possibly explains Tuesday’s late gold price surge to record highs.
From the gold producer’s press release:
The Equity Offering and the Mandatory Convertible Bonds Offering are together intended to raise sufficient funds, together with funds drawn from AngloGold Ashanti’s existing credit facilities and cash on hand, to effectively eliminate AngloGold Ashanti’s gold hedging position while maintaining a strong balance sheet to fund its existing development projects and exploration initiatives.
Pending this, the net proceeds of the Equity Offering and the Mandatory Convertible Bonds Offering may be used to reduce AngloGold Ashanti’s short-term borrowings and borrowings outstanding under its revolving credit facility, if any, or retained as cash in accordance with its cash management policies.
In connection with the Equity Offering and the Mandatory Convertible Bonds Offering, UBS AG (London Branch) and Morgan Stanley & Co. Incorporated may over-allot or effect transactions which may support the market price of AngloGold Ashanti’s ordinary shares, ADSs and Mandatory Convertible Bonds at a level higher than that which might otherwise prevail for a limited period after the trade date. However, there is no obligation of UBS AG (London Branch) or Morgan Stanley & Co. Incorporated to do so. Such stabilising action may under no circumstances continue beyond the 30th calendar day after the trade date.
The company’s Johannesburg-listed shares moved sharply lower on the news:
Only in August, research from VM Group had shown that global gold hedges rose the most in eight years during the second quarter of 2010, according to Bloomberg.
As the report noted, however, hedging programmes were mainly conducted by Australian producers:
The worldwide hedge book gained 200,000 ounces to 7.4 million ounces in the quarter, the first increase since the first quarter of last year and the largest gain since the first quarter of 2002, VM said in a report.
Gold producers sometimes sell future output at fixed prices to secure loans. They can reduce hedges by buying back contracts, adding to demand. Australian miners including Dragon Mining Ltd. and Norton Gold Fields Ltd. helped increase the hedge book of the country’s producers by about 420,000 ounces in the quarter, VM said.
The above coincided with a more subdued gold price at the beginning of the year, and followed an intensive spell of de-hedging by the industry overall — as noted in the below chart from Barclays Capital:
Commenting on AngloGold Ashanti’s move, analysts at Merrill Lynch said that at current prices it would cost the producer some $2.41bn to unwind its hedges completely:
Hedge book 3.22Moz; negative MTM $2.41bn As at 30 June 2010, AngloGold Ashanti had total outstanding commitments against future production of 3.22Moz or 100t, dated to 2015. The total net delta was 3.06Moz (95t). The marked-to-market value of all hedge transactions making up the hedge positions was a negative $2.41bn (negative ZAR18.40bn) as at 30 June 2010.
Minimal NPV impact, maintain neutral recommendation Based on estimated proceeds outlined above and the hedge buy back we estimate a positive impact on 2011/2012 earnings of around 20%, and a modest downgrade to our CY2011NPV. Our gold price forecast (real) currently stands at 2011 $1,320/oz, 2012 $1,330/oz, and 2013 $1,200/oz. We have a neutral rating on the stock with price target ZAR370/sh.
Of course, whether gold prices rise enough to make the $2.4bn opportunity loss incurred by the unwound hedges worthwhile, we will have to wait and see.
But at least, for now, it seems the gold bugs are vindicated.
Related links:
Gold gains as central banks stock up - FT
What really drove gold this week? – FT Alphaville