Our thoughts

Many a miner’s dirty little secret

The vast majority of gold mining companies globally make a very big thing about being non-hedgers. They have it on their website home page and it often features heavily in all investor communications. Rather like the shop windows that have the “no cash kept on premises”, they are strongly declaring no “financial derivatives inside”.

Hedged or not, with the possible exception of Resolute Mining (ASX: RSG) which recently announced it was now sometimes accumulating bullion, all gold producers must essentially convert all their gold production into currency in any given reporting period. Hedgers will generally have a modest proportion of quarterly production pre-priced, whereas the non-hedgers are challenged with selling all of their production this week, next week and every other week. At 2,600 tonnes a year of production around the globe that’s nearly 51t a week, or nearly 325,000 ounces each and every day of the year that gold producers collectively have to get to market.

Take a look at a gold price chart and you will notice it’s quite volatile from quarter to quarter and there are plenty of periods where prices are falling, sometimes for extended periods. It is, after all, as mining companies like to tell us in the dark depths, a cyclical business. Gold prices cycle!

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Gold’s insiders, and outsiders

Over the past four to five years there has been a stark and growing difference between the way in which Australian and North American gold mining companies sell their gold and manage the associated risks of having high and largely fixed costs, and often high debt, against a totally variable, market driven, revenue line.

In short, the vast majority of North American companies do absolutely nothing about gold price risk management. Indeed they generally promote being totally exposed to price volatility as a virtue. By comparison the number of Australian companies that have forward sold some amount of expected future production, and do so on a regular basis as part of their overall business planning, continues to grow.

On a recent trip to North America, colleagues and I visited a broad cross section of gold producers. We shared with them analysis we had conducted on the changing face of Australian gold producers’ hedge books over the three years 2014-2016. Having seen many Australian companies benefit from increased revenue predictability, in increasingly unpredictable markets, we were keen to understand the reasons for the growing void.

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