Gold giants gather as investors hedge their bets

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Gold giants gather as investors hedge their bets

By Paul Simao

DENVER, (Reuters) - The controversial issue of hedging will take center stage as the world's largest gold companies gather in Denver this week to ponder the health of the volatile gold market.

Hedging, a practice that allows firms to guard against a fall in commodity prices by selling future production at a fixed price, looked like a nifty idea for much of the last two years as gold snapped through a series of multi-year lows.

But for the past month, it has been the kiss of death.

Panicked by the recent surge in gold prices and the prospect that some companies could be forced to sell the precious metal below market prices, nervous investors have unloaded the shares of hedged producers with a vengeance.

Ashanti Goldfields Co Ltd. , Africa's third-largest producer, was among the first to feel the heat after it revealed two weeks ago that a complex derivatives-based hedging program had put it on the wrong side of the gold rally.

The company's stock plunged by about 50 percent as the scale of the bad bet -- some analysts have estimated hundreds of million of dollars in paper losses -- prompted a wave of margin calls from gold hedging counterparties.

The Ghanian producer, which is now mulling over a takeover bid from British miner Lonmin Plc , closed at $4-5/8 a share Friday on the New York Stock Exchange.

Cambior Inc. , a mid-sized Canadian producer, also suffered the wrath of skittish investors when it disclosed earlier this month that it had hedged a significant portion of its future production at an average price of $318 an ounce.

The disclosure occurred in the middle of a stunning rally that pushed the price of gold up $50 to near $325 an ounce.

The precious metal traded at $314.40 an ounce Friday.

"There is a cost to everything. The gold producers thought they were hedged on the downside. What they have found is those hedges don't work on the upside," said John Ing, president of Canadian brokerage Maison Placements Canada Inc. in Toronto.

"Our estimate is that a great many producers are out of whack (on their hedging positions)."

The pressure on gold producers to unveil the size of their hedge positions could become unbearable in the months ahead if bullion shows signs of sustaining its rally.

Gold, which plummeted to a 20-year low of $251.70 an ounce in August amid concern about British bullion sales, bounced back late last month after 15 European central banks pledged to cap future gold sales.

Central bank sales, along with a strong U.S. dollar and weak worldwide demand for metals, were one of the key factors in a devastating downward draft that engulfed the thinly traded gold market beginning in 1997.

With the black cloud of central bank sales having passed from the horizon and the lease rates at which banks lend gold having risen, the giants of the industry have been driven to reassure nervous investors. In some cases, however, hedge positions have been quickly closed out.

South Africa's Gold Fields Ltd. , the world's second largest producer, took the lead last week when it announced it had closed out a large chunk of the 1.8 million ounces of gold it had hedged through a mix of forward sales and call options.

"Having looked at the fundamentals of the current gold market and the implications of the Ashanti situation, it seems inevitable to us that higher, if not much higher, gold prices are possible," Gold Fields Chief Executive Chris Thompson said in a press release.

Analysts, however, advised investors searching for bargains in the gold sector not to shy away from solid, blue-chip miners merely because of their exposure to hedging.

"There is a greater-than-should-be perceived notion that all hedge books are potential issues right now. They're not in my view." said Daniel McConvey, analyst with U.S. brokerage Goldman Sachs in New York.

"The average amount of production that North American companies have hedged is probably less than two years. I think the market here can deal with that and the counterparties can deal with that," McConvey added.

Canadian-based Barrick Gold Corp. , often credited with maintaining the most prestigious hedging program in the gold sector, is one company that does not appear to have been spooked by the controversy.

Barrick, North America's largest gold producer after Newmont Mining Corp. , has dismissed suggestions that its hedge book of 13 million ounces could lead to a liquidity crisis similar to that haunting other producers.

Barrick insisted last week that a strong balance sheet and solid A credit rating had allowed it to build a hedge book that protected shareholders from falls in the gold price while exposing them to the benefits of a price surge.

The company said it had locked in low gold lease rates near 2 percent on its hedge book and that it continued to hold a unilateral option to defer forward sales contracts by up to 15 years if the price of gold continued to rise.

Denver-based Newmont does not have a significant hedging program.



-- Andy (2000EOD@prodigy.net), October 18, 1999

Answers

Notice the controlled press, with the obligatory quote from Goldman-Sucks saying "no problemo".

Wonder how that compares to what they are saying/doing behind closed doors.?

-- profit_of_doom (doom@helltopay.ca), October 18, 1999.


Andy,

As I have said before on this matter, I now believe the big powers are back in charge. Goldman says no problem. Well, where *is* the problem, as far as they are concerned? A couple of mines go belly up, so what? The gold is still in the ground. The supply is further controlled. The troubled mine is now a "takeover" candidate. No banks are failing, or none that matter. Where's the problem? So far, I don't see any problems to the high rollers. I say all this sadly, but it seems to be too true.

-- Gordon (gpconnolly@aol.com), October 18, 1999.


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