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New Barrick chief uses the h-word

by Frik Els | December 5, 2013 | Reprinted by permission of MINING.com

Gold producers reduced their hedging for the first time in three quarters, according to the latest data about forward-selling in the gold mining industry from metals research firm GFMS.

The outstanding producer hedge book now stands at 3.6 million ounces, or 112 tonnes, nowhere near the levels seen before gold began its 12-year upward climb.

Locking in prices and steady cash flow made sense for gold miners when gold was around the $300 level with little prospect of any substantial move higher.

New Barrick chief uses the h-word

Hedging as an analytical intellectual exercise.

But as gold’s bull run gained momentum gold miners lost out on billions of dollars under contracts signed for future delivery well below the ruling price—and often below cost.

Now with the rally in precious metals losing steam, market watchers believe hedging may be making a comeback.

And the world’s number one producer of the yellow metal no longer thinks hedging is a dirty word.

John Thornton, the ex-Goldman Sachs banker who next year takes over the helm at Barrick Gold TSX:ABX, said the idea of dusting off the hedge book should not be automatically ruled out:

“I don’t know why you wouldn’t look at it, if for nothing else as a kind of analytical intellectual exercise,” Thornton told WSJ.com. “And try to then make a judgment. I don’t understand people in the industry who would say you should never do that.”

Toronto-based Barrick, like its peers in the industry, spent billions unwinding its hedge book in 2009, but ended up still saving money on the deal as gold’s rise still had a good two years to go.

Barrick, set to produce more than seven million ounces in 2013, has embarked on an aggressive cost-cutting program and in October said it has reduced its 2013 guidance for all-in cash costs by a full $100 per ounce and that 75% of this year’s production will be mined at a cost of less than $800 an ounce.

That compares to an industry average of $1,200 to $1,300.

GFMS analyst William Tankard told Reuters that Barrick is well placed to take advantage of hedging thanks to its relatively low operating costs, but Tankard doesn’t envisage a large-scale return to forward selling:

“Interest rates remain exceptionally lean, and gold liquidity is not great. There aren’t many central banks looking to lend over long tenures at the moment,” he said. “Coupled with that, options hedging will not be especially cheap right now. So it is a tough decision.”

Gold is coming off a 12-year bull run and has shed close to 27% so far this year. After a drop to $1,226 on December 5 the metal is within shouting distance of a three-year low.

The price of gold peaked at an all-time high of $1,921 an ounce in September 2011.

Reprinted by permission of MINING.com

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