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Friday, July 12, 2013

Are Gold Miners Hedging their Forward Productions Again?

With the anguish suffered by miners of late, and production costs for many having exceeded  the higher "market" prices of gold,  we got to wondering if indebting themselves again to the bullion banksters would be their choice of defense to stay alive.

Many of you will recall when Ashanti "blew-up" in 1999 by not being able to make good on their obligations. Flashback article below.
Chart from 2009. Forward hedges seem to have been nearly exhausted.
Time for the banking cartel to repeat the scam again?

Thinking a little deeper behind the late metals crash, this would be a great opportunity for the banksters to "buy" the forward mining production ounces at forward prices higher than currently. With the bankers holding hoards of free taxpayer money, couldn't they just apply those funds to buy-up all future gold and silver for themselves?

Anyone out there tracking the miners' forward contract hedges? Isn't this something we should be following?

October 7, 1999

Heard on the Street

As Price of Gold Soars, Firms Find 'Hedges' Can Be Thorny


Pity the poor gold bugs.

Investors in gold stocks ought to be celebrating the explosive rally in gold prices that began last week when 15 European central banks announced plans to cap gold sales.

The news touched off a surge in gold prices to $324.50 Wednesday, up 10 cents, from $255 an ounce before the rally began last week.

But this week, some gold investors have put away their party hats. After a run-up in price last week when gold prices jumped, gold stocks took a hit on Tuesday and Wednesday. The problem:

Some gold-producing companies made financial bets to protect them against further declines in gold prices, and those bets cost them money when gold prices shot up unexpectedly.

When gold prices spiked, some of those hedging programs backfired, triggering margin calls, or demands for more collateral. One result: a scramble among some gold producers, as they were forced to come up with gold or sustain losses in their hedging accounts.

Wednesday, the Philadelphia Stock Exchange gold index closed at 81.64, down more than 10% from its peak on Sept. 28, the day of the central banks' announcement. Among those hardest hit was Ashanti Goldfields, which has seen its shares plummet from a high of $10.125 on Sept. 28 to $4.125 -- down $1.375, or 25%, Wednesday as word spread of a liquidity crunch at the Ghanaian gold producer.

The affair is a reminder to investors of the risks of hedging. While hedging programs by commodities producers can smooth out the companies' earnings by locking in prices of future sales, they can also reduce the producers' gains in the event of a favorable upward price move.

Meanwhile, trading desks were buzzing Wednesday with rumors about Wall Street's dealers and their exposure to Ashanti and other producers as trading partners on derivatives contracts. According to numbers provided by Ashanti to its counterparties recently, the Wall Street firms with the largest credit exposures to Ashanti are Goldman
Sachs Group, $105 million; Societe Generale, $82 million; Credit Suisse First Boston, $62 million; UBS, $61 million; American International Group, $32 million; and Chase Manhattan Bank, $25 million.

Traders said some of the dealers had structured their own side of the transactions to reduce their net exposure. What is more, the size of the dealers' exposures -- which has reached an estimated $500 million or more for the 17 members -- fluctuates daily with the price of gold.

Officials of Ashanti said they had signed a standstill agreement Wednesday with its dealers to stave off margin calls. On Tuesday, Ashanti confirmed that it is in merger talks with Lonmin, a United Kingdom mining group.

Ironically, Ashanti's short-term cash squeeze comes at a time when its 23 million ounces of gold reserves have actually increased in value; the hedging program only covered about 10.5 million ounces.

Some of the gold dealers blame the snafu on the European central banks' recent imposition of restrictions on the growth of gold leasing that had accompanied last week's announcement. The new leasing restrictions have contributed to the tight supply conditions triggering the gold-price rally, because sometimes gold-market participants who need to deliver the metal count on the leasing market to obtain it.

Shares of Cambior, a Montreal producer, also took a nose dive Wednesday, falling $1.1875, or 37%, to $2 on fears that the company could be forced to buy large amounts of gold at the current high price to cover a hedge that was arranged before gold's recent surge.

Cambior said Wednesday it had sold options on 921,000 ounces of gold, while its production for the first half of the year was only about one-third that amount. In a statement, Cambior said the counterparties to its hedging contracts are international banks and other financial institutions, and the company "will pursue discussions with such financial institutions concerning the management of this situation."

Other big gold stocks took a beating Wednesday as well. Newmont Mining fell to $27, down $1.875, or 6.5%; its high Tuesday was $30.3125. Barrick Gold dropped to $21.5625 Wednesday, down 81.25 cents, from a high of $26 on Sept. 28.

The irony is, a big jump in the price of gold is supposed to be good for gold stocks, not bad. "As gold investors, we have suffered long," says Caesar Brian, who heads the gold fund at Gabelli & Co. "Now we have a big pop, but we find out there is a dark underside to it," he says.

In general terms, producers are being stung by hedges.
There were a couple of ways producers were able to do
that, including "forward" contracts and options. As the price
of gold has spiked, however, those contracts have become
liabilities, forcing producers to deliver gold at higher
prices, in some cases, and to meet margin calls in other
instances, where options losses are an issue.

The divergence of gold prices and gold stocks is even more
interesting, since it shows how aggressive producers had
become recently in their hedging programs. "The knee-jerk
reaction was to buy the stocks," says George Gero, senior
vice president of investments at Prudential Securities. "But
on reflection, people are realizing that the producers were
hedged at lower levels and that they ought to think twice
about their exposure," he says.

In some cases, says Toronto-Dominion analyst David
Neuhaus, producers may not have had much of a choice,
especially those that were financially pressed as a result of
the steep decline in gold prices, which hit a 20-year low
before the recent rally.

"Some of these producers were looking at problems
because of very low gold prices in the last several months.
So there was pressure for lenders to try to limit their
downside through hedges," he says.

The question now is whether there is another shoe to drop.
Mr. Neuhaus says he believes gold stocks as a group are
being unfairly punished. "These stocks are not reflecting
what they should at this gold price," he says. One of the
most aggressive users of hedging programs is Barrick Gold,
one of the world's largest gold producers. The company has
long earned a premium over the gold spot price by selling
its gold forward in a unique hedging program.

When Chairman Peter Munk started Barrick in 1983, "one
of the founding principles of the company was to be
conservatively financed and minimize the gold-price risk,"
spokesman Vince Borg said. Over the past 12 years,
Barrick says it has earned a total of about $1.5 billion in
added revenue from its hedging program, which is based on
"spot deferred contracts."

Under such contracts, the producer borrows gold from
central banks and sells it in order to earn interest on the
proceeds. The company profits the difference between the
central banks' "lease rates" and the interest earned.
Fortunately for Barrick, the spot price for gold over the past
12 years has always been below the amount the company
could earn by hedging.

And Barrick earlier this year locked in the lease rates it
will pay over the next few years at rates "substantially
lower than where they are now," at about 6% or 7%
annually, said Barrick Chief Financial Officer Jamie

But now with gold soaring, the prospect that spot prices
will rise above Barrick's hedge price is increasing.
Currently, Barrick says it has sold forward about 13.3
million ounces of gold at an average price of about $385
per ounce through 2001.

However, if the spot price does rise above $385, Mr.
Sokalsky said Barrick has the luxury of deferring its
forward contracts for as long as 15 years and instead
selling its gold production at the spot price. That means the
company can wait for spot prices to return to lower levels
before returning its borrowed gold to the central banks.

-- Mark Heinzl contributed to this article.

October 7, 1999