FRESNILLO's Herradura mine in Mexico, part of its Penmont portfolio.

FRESNILLO's Herradura mine in Mexico, part of its Penmont portfolio.

Hedging Chitchat Sounds Bullish Note for Gold

Issue 116, February 2015

A tentative rise in hedging suggests that gold market confidence is close to its lowest ebb, sounding a bullish but muted note for contrarian investors.

More than 110,000 ounces of gold have already been sold forward this year, on top of 6m ounces of silver, equal to nearly 200,000 ounces of gold equivalent. That compares to a 278,000 ounce rise in hedged production in the first quarter of 2014.

Forward sales have largely been limited in recent years to short-term tactical hedges, used by Northern Star to backstop acquisitions or Shanta Gold and Beadell Resources as a ‘last-dollar’ funding technique, bringing new mines into production.

Two months into 2015 however and companies appear to be extending both the size and duration of their hedges, using them to backstop cost-cutting rounds, rather than expansion.

On Wednesday, ASX-listed Ramelius Resources said it has hedged 47,200 ounces of output from its flagship Mount Magnet mine, equal to 40 per cent of production over 2 years, whilst Perth-based Norton Gold Fields has already upped its gold hedge twice this year, lifting it to 50 per cent of production until the end of 2016.

Aurelia Metals, also listed on the ASX, sold 10,500 ounces forward last week, whilst Banro Corp. is negotiating a $41m forward sale over 4 years from its Twangiza mine in the Congo.

Hochschild & Fresnillo

Larger miners are also playing ball. Hochschild Mining has hedged 6m ounces of silver and 38,000 ounces of gold for 2015, equal to more than a third of projected output and a sharp rise on last year, when its hedges were limited to one fifth of production.

Silver giant Fresnillo has likewise moved to sensitize the market to rising hedges, saying in October that it plans to sell forward up to 44 per cent of gold from its Penmont mines in Mexico. “This is going to be done very slowly,” a representative for the company warned.

Whilst hedges act as a dampener on prices, allowing miners to sell future output into each rally...


“Hedging is for gardeners.”


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