The collapse of zinc-miner Pasminco almost three years ago due to its withering hedges should have been warning enough to Australian companies about the dangers of forward selling, according to the Australian Securities and Investments Commission.
The collapse of zinc-miner Pasminco almost three years ago due to its withering hedges should have been warning enough to Australian companies about the dangers of forward selling, according to the Australian Securities and Investments Commission.
However, ASIC director of corporate finance Richard Cockburn said with the recent collapse of Sons of Gwalia it appeared some companies might still be “asleep”.
He would not confirm or deny whether ASIC was investigating SoG over the timing of public disclosures.
SoG, one of Australia’s largest gold miners, was put into voluntary administration after it discovered its gold reserves could not meet its forward hedging commitments.
The company has released an explanation about this matter to the Australian Stock Exchange.
Mr Cockburn said the collapse should also sound a warning to mining company boards around the country about the interaction between hedging commitments and reserve statements. He said hedging had the potential to rapidly turn a marginal balance sheet into one horrifically in excess of its assets.
“Hedging is a bit like negative gearing. It can be dead dangerous if things go wrong,” Mr Cockburn said.
Hedging or forward-selling of a commodity at an arranged price, particularly in the gold industry, goes in cycles.
“At one stage it is considered risky to hedge and then it goes through the cycle to where it is considered to be imprudent management if you don’t hedge,” Mr Cockburn said.
The stage in the cycle is generally dependent on the commodity price and exchange rate levels.
“I would have thought we would be in a phase where it is not very wise to be hedging, particularly post-Pasminco. I suspect SoG probably confirms that,” Mr Cockburn said.
His comments come as the world’s biggest gold miner Newmont, which is bullish on the price of gold, sounded similar warnings saying more gold companies risked financial difficulties if they over-relied on hedging.
One company that recently adjusted its hedging structure is Australia’s biggest gold producer Newcrest.
Newcrest general manager corporate affairs Peter Reeve said hedging at Newcrest was used to mitigate risk and the restructure was conducted to increase the transparency of its hedging program.
Mr Cockburn said things could go wrong when hedging ceased to be a genuine risk management tool and instead became a profit centre.
“That means it’s usually crossed the line from being a prudent risk management tool into a cost centre or risk centre,” he said.
Mr Cockburn said the other alarm bells the SOG collapse should trigger, particularly for mining companies, was the correct measurement of resources. He said the recent Royal Dutch Shell write down incident was a reminder of this.
Shell admitted in February that it had over-estimated its oil reserves which wiped billions off the market value of the group and forced the resignation of much of the senior management.
“To that extent it [the SoG collapse] is a useful reminder for Australian companies to make sure that they are on top of these issues,” Mr Cockburn said
One possibly bright note from the comparison to Pasminco, is that Ferrier Hodgson has been appointed administrators to SoG.
That firm handled the restructure and eventual re-float of Pasminco into its new incarnation, Zinifex.
