Gold Hedge Book falls to 236 tonnes

Rhona O'Connell, Mineweb.com

The latest Global Hedge Book survey from Société Générale, (compiled by GFMS Ltd, using the Brady Trinity^TM trading and risk management software) shows that at the end of 2009 the global delta-adjusted hedge book stood at just 236 tonnes, a far cry from the 2,064 tonnes when it was at its peak in 2000.  De-hedging in the fourth quarter was 125 tonnes, making up more than half the year's total of 246 tonnes.  This means that net mine supply in 2009 was reduced by 9% last year, to 2,317 tonnes against production of 2,553 tonnes (GMFS figures).

The biggest changes came from Barrick Gold as it closed out the remainder of its fixed-price forward sales (ahead of its September 2010 target) and this elimination was of course also a major contributor to the improvement in the marked-to-market liability of the book, which contracted to -$2.9 billion in the fourth quarter.  Barrick was responsible for 90 tonnes of the quarter's dehedging and 165 tonnes of the full year's activity, meaning that the rest of the sector removed 35 tonnes in the quarter and 81 tonnes in the rest of the year.  AngloGold Ashanti, which was the second largest de-hedger in the quarter (14t) is now the largest open book, at 108 tonnes - or 46% of the outstanding position, meaning that the rest of the hedged population account for 128 tonnes.  Polymetal was the third largest de-hedger, at ten tonnes.  The fall in the volume of outstanding options positions was largely due to contracts reaching maturity rather than any proactive unwinding.

The majority of the reductions to the book were through the forward sales component, so that at the end of December, forwards and loans accounted for just 44% of the book with the remainder in options.  If the book is considered in nominal terms, then at the end of 2009 forward sales comprised only 23% of the total, while a year previously forward sales were 56% of total.  This is a function of cuts in the forward book rather than a specific preference for option exposure.

The largest component of the options position is sold calls (65% of total - an implied 85 tonnes).  The study looks in detail at different companies and their position changes and argues that when this composition is combined with the high implied delta on the aggregate call position, by contrast with the low implied delta on the aggregate put position, the inference should be that "the options portion of the book is currently functioning more as a cap to price upside!" rather than as downside protection.  The study contains a matrix of the impact on the book of changes in price volatility and the underlying price itself.  A $100 rise in the gold price, for example, would increase the side of the book by 90,000 ounces (almost three tonnes), while a fall would cut it by 100,000 ounces (3.1 tonnes).  Obviously the evolution of the book is to large extent a function off AngloGold Ashanti's attitude

Net de-hedging is expected to continue this year despite the limited size of the existing book.  The company's strategy currently outlines a continued reduction of the hedge book, and there are indications that this reduction will be accelerated from time to time when circumstances suggest it.  The existing delivery schedule for the global book suggests that there are perhaps 25 tonnes of outstanding forwards due for delivery this year and just over 30 tonnes in 2011.  Including options positions, the schedule for this year amounts to 59 tonnes coming to maturity this year and perhaps 65 tonnes in 2011.  The analysts expect a continued acceleration of the programme this year and see the potential for around three million ounces of dehedging this year.