Guest Post: Recent Gold Hedging Activity – a Warning Sign?

Tyler Durden's picture

Submitted by Andrey Dahskov of Casey Research

Recent Gold Hedging Activity – a Warning Sign?

In the first quarter of 2011 (Q111), net gold hedging was reported by GFMS and Société Générale. A gold mining company may hedge its production on expectations of falling gold prices in order to lock in high prices and possibly avoid losses. As gold hits one nominal high after another, is such behavior a sign that the bull market in gold is over?

To answer that question, we had a look into Boliden’s (T.BLS) latest interim report. The GFMS study mentions that in Q111, Boliden was one of the most active hedgers; it was accountable for 58% of gross hedging activity during that period. Let’s have a closer look at the company.

Boliden is not a pure gold mining company. Gold is metal number three in Boliden’s portfolio, after copper and zinc. In the second quarter of 2011, Boliden produced 158.5 million pounds of zinc and 45.2 million pounds of copper in concentrates. Gold production in Q211 amounted only to 35,062 ounces; silver, 1.9 million ounces. Boliden is a regular hedger.

Under the current gold price environment, in the beginning of 2011 Boliden decided to increase its gold production. It plans to accomplish this by expanding operations at its Garpenberg zinc-copper-lead-gold-silver mine and by starting up a new mine, Kankberg, which would produce tellurium and gold. Both are located in Sweden.

Boliden used hedging to insure its planned US$614 million (SEK3.9-billion) investment into Garpenberg and US$75 million (SEK475 million) investment into Kankberg. At Kankberg, it hedged all future tellurium production and 80 percent of the gold output. The company wants to leverage on the current high gold and tellurium prices to make sure Kankberg operations remain profitable.

Boliden’s case is quite understandable. Hedging has been the company’s policy for quite a long time, and the need to insure two large new production initiatives resulted in an unusual amount of new contracts.

While Boliden seems to continue committing a significant portion of its future sales in the form of forward contracts, about 60% of all deals at the end of the first quarter make use of a different vehicle: collar options.

The collar-option strategy provides the seller with a balance of limited downside and more flexibility on the upside. The strategy in essence provides a trader (a mining company, in our case) with a price corridor for the contracts to fluctuate within. This is more flexible than setting up a fixed forward price.

It is quite interesting to see what the current price corridor for future gold sales looks like, judging by the option positions held by gold hedgers. Have a look at the following table:

Company Downside Cap Upside Cap
Minera Frisco, S.A.B. de C.V. 1,229.52 1,799.45
Industrias Peñoles, S.A.B. de C.V. 1,100 2,140-2,622
Golden Star Resources 1,050-1,200 1,457-1,930
Coeur d’Alene Mines 940.35 1,852.62

The numbers seem quite familiar. The “floors” remind one of some of the more conservative gold prices used in the current economic assessments of gold projects: US$940.35 is close to what Exeter Mines (T.XRC) used as the lowest gold price in its prefeasibility study on the company’s monster Caspiche deposit (US$1,000). The highest “ceiling,” US$2,622, is higher than most of the “best-case” mine scenarios, but is understandable as a gold price projection based on how the metal has been performing so far in 2011. In short, these numbers do not seem to reveal anything that we don’t already know… the timing, however, is quite interesting.

Timing is an important parameter in option pricing. As it turns out, on average the hedgers’ contracts span over quite a short-term period. Quoting the GFMS report:

While the industry as a whole appears to be less vehemently opposed to hedging than was the case a couple of years ago, we note that most hedging is still being undertaken over a short to medium time frame: little hedge cover extends beyond 2013.

There are outliers, however; and Boliden is one of them.

It is interesting to note that around half of [Boliden’s] contracts are scheduled for delivery between 2014-2017; the longest dated contracts seen for quite some time, put in place to secure the long term viability of the Garpenberg expansion.

As we see, the reasons behind the increase in hedging are understandable. There are no signs of a tectonic shift in producer attitudes towards gold. The most cautious ones take advantage of the metal’s price increase, but their actions are largely company- and even project-specific. Hedging can be a good way to increase investor confidence in a mining project, to insure their investments, or to secure a bank loan. We do not see that positive net hedging in the first quarter is alarming – the economic problems bubbling to the surface now should provide a lot of reasons for the gold price to continue rising for quite some time.

Finally, most of the global hedge book is comprised of recent contracts, the report says. They were entered into when gold hit nominal highs and some of the mining companies started acting protective of their future revenues.

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FunkyMonkeyBoy's picture

I thought this was Zero Hedge? Pussies.

JW n FL's picture

FMXconnect did a wayyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyyy better job a couple days ago.. on the collar trades.. $1,700 - $2,000.


Fukushima Sam's picture

OT, but important for those who get most of their news from ZH...  ;-)

Workers at Fukushima claim that cracks are appearing in the ground at the plant and radioactive steam is escaping form the cracks.

If true, this could be the start of the China Syndrome scenario.

Not good...  :-(

JW n FL's picture

Thanks for the Heads Up!!

++++++++++++++++++ on we are all going to die soon!

if we were back in Greek times I would have you killed.

get it? kill the messenger?


Thorlyx's picture

It seems, the core has left the building.....

Gringo Viejo's picture

Where the fuck is that skank Fonda when you need her?

Can I get a fuckin' witness here?

JW n FL's picture

Amen!! Preach It!!

Drill Baby Drill!

narapoiddyslexia's picture

Sort of OT question, but not much. Silver and gold have been moving in lockstep for the last 20 hours, even down to the smallest moves.

Anybody know why? Recently, they've been ignoring each other?

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

I thought she looked pretty good in "Klute".  Last time I saw her was at a movie theatre in Santa Monica with her then husband Tom whatever a politician at the time.

Oh regional Indian's picture

Well, a Charlie "Look at my Gravitas" Rose appearence means she too is establishment. 


JW n FL's picture

Workers at Japan's Fukushima plant say the ground under the facility is cracking and radioactive steam is escaping through the cracks. The cooling system at the plant failed after the devastating tsunami hit Japan in March, sparking a nuclear crisis. But new evidence suggests that Fukushima reactors were doomed to cripple even before the massive wave reached them. RT's Anissa Naouai talks to Dr. Robert Jacobs, a Professor at the Hiroshima Peace Institute.

slewie the pi-rat's picture

t.y., F_u_sam!

we may have a new volcano, soon, eh? 

nothing to see here...tents will be in place, conditions permitting, for those who are not raptured.  trust us!

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

F. S.  I have been taking:  sea adine, Spirulina and liquid zeolite since March as have my loved ones.  Most people give this no thought but this is a growing calamity and clean up will take 10-20 years.  I choose not to die a lingering cancerous death decades from now because I thought it couldn't happen to me.  Thanks for your intermittent posts on this truly scary issue. 

One thing I just found out is that last spring hippo hips Hillary Clinton made a deal with the Japanese agreeing that foodstuffs coming from Japan to the U. S. are safe and need not be monitored for radiation.  (Remember when right after 9-11 EPA Director Christie Todd Whitman said the air in NYC was safe to breath.)  To date more people have died from the results of contaminated air after 9-11 than died in the direct attacks.

dollarslide's picture

@Tuco - you might want to check out ZeoForce zeolite (powder) on Amazon, it has better potency reviews. Chlorella is good too.

Triggernometry's picture

Regretably much appreciated, thanks for the link. 

This can only mean the corium (molten fuel) has melted its way down to bedrock.  FUCK

I had been hopeful the Japanese would have contained this within ten years.  Compared with Chernobyl, which is due to finally be completely sealed off in 2015, I had a good degree of confidence Japan would have tackled this catastrophe efficiently; if indeed the corium has reached bedrock, it is likely to never be fully contained.  This is horrible news for the world, even worse for Japan.

Bullionaire's picture

Crap.  That "George Washington" dude was right all along.





JW n FL's picture


Georgie is the shiiizzzelll!

bbbilly1326's picture

WOW,  only 3 posts in, and the whole article is hi-jacked, away from discussion of gold, on to Fukushma.......these be some high class whores...........

jaffa's picture

The farmer has hedged his exposure to wheat prices, he no longer cares whether the current price rises or falls, because he is guaranteed a price by the contract. He no longer needs to worry about being ruined by a low wheat price at harvest time, but he also gives up the chance at making extra money from a high wheat price at harvest times. Thanks.
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jaffa's picture

Investment and accumulation goals is planning how to accumulate enough money for large purchases, and life events is what most people consider to be financial planning. Major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for education expenses, and saving for retirement. Thanks.
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centerline's picture

Need to get some conversation going somewhere regarding the Roubini versus ZH subject that has kicked up today.  Of course, it also means ZH gets some more deserved attention too.

Cult of Criminality's picture

Moles are eating my hedge

rosiescenario's picture

...get yourself a rodentator....and some ear plugs.

caerus's picture

i'm short...i'll admit r now...long goldschlager...

robertgray's picture

A gold business must hedge their production. They are not speculators. They are producers. They must sell all they can at a profit. If they can lock in a profit now, that is for the best. The company (and jobs) will be here next year then.

If they held onto more gold, they would get crushed in a downturn. Cash flow is key for miners.

disabledvet's picture

Besides who says the bank won't just sit on the gold?

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Wrong!  If they want shareholders they'd better not limit entirely any upside potential in the underlying asset.  Best to hedge a percentage, not all.

rosiescenario's picture

Yeah, as a former shareholder of ABX I was just delighted by their hedging....a brilliant strategy.

After all investors buy gold or silver miners because they believe the price of the metal is going up....they do not want to find out production was sold forward at today's price.

Spitzer's picture

I have heard from many sorces that base metal miners are not very brite. It makes sense that they would put themselves in a losing position.


dumpster's picture

sure berrick gold was putting hedges in at 300 gold .. they really had it nailed

hedgers are not the brightest bulbs in the room



Oh regional Indian's picture

dumpster, Barrick is a Khassogi/Bush/Some Canadian oligarch play. The details are available all over th eweb and print.  As are most large miners in the world.

You think they will own the physical and not own the source? Gold is not a safe haven in my book. Too many surprises hidden up their sleeves.


DonutBoy's picture

It's not "normal" gold time.  The global fiat currency collapse thing seems to happen about once, oh let's see, about once so far in human history.  The nation or nation's backing the three largest tradable currencies, dollar, yen, and euro, are all insolvent and they can't hide it.  I suppose one could compare it to debasement of Roman currency, arguable global, but not fiat.

This is all new, we're off the reservation.  Mining hedges don't tell me anything about what money is going to be 5 years from now.

oblonsky's picture

this time is different.

DeadFred's picture

Those one-in-a-trillion events seem to be happening a lot more often nowdays. This time is very different in many ways.

Manthong's picture

A trillion ain't what it used to be.

caerus's picture

btw slim "hedged" his ag a while back...just saying...

caerus's picture

hell I knew that already thanks though

btw minera frisco owns six mines I least five mine ag if I remember correctly

Flakmeister's picture

Some juniors are forced to hedge in order to secure the financing needed for developement. GSS probably fall into this category....

breezer1's picture

the big money is getting physical from the mines and buying future production with lose little deals. the miners are being shorted heavily and weak hands are leaving in disgust. the strongest hands for the most part happen to be the biggest crooks. most here know the names. 

there is nothing safer in these perilous times than physical. if they return to gold based paper then they will have to devalue against it and if not its happening anyway.

i have trouble understanding why anyone would be anything but physical at this point.


--Freedom--'s picture

Slightly off topic, but worth a try: I have a good portion of my money in physical gold and silver, but also a good portion in PHYS, Sprott's gold trust. Any opinion on the safety of this? I've read everything i can find online and it seems safe. Seems a lot better than GLD, obviously, but am considering liquidating and going to coins.
Thanks in advance if anyone has any thoughts or experience with PHYS.

High Plains Drifter's picture

just curious. but do you live in canada or the lower 48?   the reason why i ask, isn't sprott located in canada?  might make a difference if one day, you wanted your stuff and then we have the weird shipping situations going on nowadays.

--Freedom--'s picture

I live in the lower 48, but not too far from the bank where the gold is. But I just read that you need to have around 600k in the fund to be able to redeem for physical. I have much les than this, so I would only be able to trade the ETN. I would think it would keep it's value much better than other paper gold, but, still, it's a bit unsettling.
By the way, I've appreciated your posts on ZH the last few months I've been reading the threads.

chubbar's picture

I believe the redemption is in 400 oz bars only so you can do the math with regard to how many share would equal that amount taking into account the present discount/premium on NAV.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Sprott seems trustworthy, but look what happened to Kitco, a highly respected company.  Big brother can come in at any time and shut down the entiry holding your gold and you are screwed!  Keep it, "cool, dry and nearby"!  I invented that phrase by the way.  Hasn't made me a dime though (90% of course):)