AngloGold Scrambling To Unwind Its $2.4 Billion Underwater Gold Hedge Book, Issuing $1.4 Billion In New Securities
One would have thought AngloGold would have learned from Newmont's hedging mistakes. Alas, who is to say that corporate officers are any better at predicting the future than the cadre of CNBC and Wall Street "analysts" who persist in seeing gold crash and burn "eventually" only to be proven wrong again and again. Today, AngloGold has announced that it is issuing just under $1.4 billion to stem the damage arising from its massively underwater hedge book which is estimated to be at around $2.4 billion. So as a result of management's bullheadedness, it is the shareholders who have to suffer: WSJ reports that AngloGold "expects to raise gross proceeds of about $686 million by issuing 15.7
million new ordinary shares and expects to raise about $686 million by
issuing a three-year mandatory convertible subordinated bond with a 6%
annual coupon. The bond will be listed on the New York Stock Exchange
and will convert to a similar number of shares." End result: dilution and shareholder value loss (stock down 5%+) when the firm should be benefiting from gold's all time record price.
More from the WSJ:
The equity offering, including the exercise of an overallotment of 2,366,086 additional shares to the underwriters, will equate to about 5% of the gold miner's issued share capital.
AngloGold Ashanti, the world's third-largest gold producer behind Barrick Gold Corp. and Newmont Mining Corp., will use the net proceeds from the equity and convertible-bond offerings, along with its own cash reserves and existing credit facilities, to eliminate its gold hedge book, which had a negative marked-to-market value of around $2.4 billion as of June 30.
AngloGold Ashanti's hedge book locked the miner into forward gold sales at an average price of less than $450 a troy ounce, resulting in substantially discounted sales compared with the spot gold price. Spot gold hit a record high of nearly $1,275 a troy ounce on Tuesday, as investors piled out of the U.S. dollar and into commodities.
AngloGold wants to use the proceeds from its capital raising to buy back or unwind the hedge, thereby giving the company full exposure to record high gold prices.
"Removing the hedge book represents the last phase of the balance sheet restructuring and once completed, is expected to give us full exposure to the gold price, widening profit margins and improving cash flow," Chief Executive Mark Cutifani said. The move would also boost the company's capacity to fund new organic expansion projects. he added.
AngloGold has already taken steps to reduce its hedge book to 2.72 million ounces as of Wednesday, from 3.22 million ounces at the end of the second quarter and 11.3 million ounces at the end of 2007.
AngloGold estimates that its current residual hedging position would likely result in an effective price discount to spot gold of about 6% to 11% until 2014 and a discount of less than 1% in 2015 if the hedge book weren't restructured, assuming annual output of five million ounces and a spot price of between $950 and $1,450 a troy ounce.
And as underwater book unwinds tend to be underlying-commodity price supportive, expect some additional upward price pressure in gold imminently.