Oceana Gold is planning to re-enter the gold hedge market to help manage the risks associated with developing three new gold mines in New Zealand.
Its decision comes less than two months after the company repurchased 100 per cent of its gold hedging contracts and illustrates the way in which hedging strategies can be tailored to prevailing circumstances.
Equigold, Croesus Mining and Newcrest Mining are other gold producers to have restructured their hedge books in recent months.
Oceana managing director Stephen Orr said the company took advantage of an opportunity in August to “close out” its hedge book, repay an old debt facility, and book a profit of more than $25 million.
However, Oceana Gold is planning to establish a new “very simple” debt facility and enter new hedge contracts. Mr Orr said some hedging was a prudent way of mitigating risk over the next two years, when the company was planning to spend $110 million developing its new mines.
“We need to ensure generation of project revenue,” he said.
“That means we will go back into the market to obtain hedging to cover production over the construction period.”
Mr Orr added that high interest rates in New Zealand would enable the company to achieve substantially higher gold prices in the forward market.
Newcrest, which is developing the giant Telfer gold project in the Pilbara, is another company that believes hedging is appropriate while it has debt on its balance sheet.
Like most producers, it has also been moving towards simpler hedging arrangements.
It restructured its hedge book in May, eliminating the entire foreign currency book and all of the complex ‘contingent’ products in the gold book, leaving only ‘plain vanilla’ hedging instruments.
Equigold has been restructuring its hedge book over the past 15 months to obtain greater exposure to gold price movements.
Commenting on the latest restructure, in June, managing director Nick Giorgetta said: “The recent increase in the $A gold price presented us with an attractive opportunity to enhance the overall delivery price of the company’s hedge book”.
Equigold also sold a series of eight-year call options with a strike price of $700 an ounce, substantially above the current market price of about $580.
In addition, it reduced the ‘gold metal fee’ allowance in its existing ‘flat forward’ contracts to reflect lower gold lease rates.
The upshot was an increase in the forward price in its existing contracts from $530/ounce to $600/ounce.
The latest gold producer to rejig its hedge book was Croesus Mining, which has forward sold part of its production at $587/ounce.
“We believe that a prudent amount of gold hedging is to the benefit of the company and our shareholders,” managing director Mike Ivey said.
He said Croesus would deliver 75 per cent of output to the spot market, ensuring it would benefit from a strong gold market.