Completing the round of hedge book publications this quarter is the study produced by GFMS Ltd in association with Investec and Brady. The figures are broadly similar to those produced by the Mitsui Group (with Halliburton Mineral Services and Virtual Metals), although the presentation and conclusions are slightly different.

The headline conclusion is that total outstanding producer positions at the end of June stood at a provisional 54.53 million ounces (1,696 tonnes), equivalent to eight months’ global production. The bulk of the de-hedging in the second quarter of the year stemmed from scheduled deliveries, as the hedge book contracted by 2.75 million ounces or 85.1 tonnes. Forward sales declined by 3% pr 1.41 million ounces (43.7 tonnes) quarter-on-quarter, while the delta hedge options position was reduced by 11% or 1.33 million ounces (41.4 tonnes).

In its market review, the group points out that the spot gold price averaged $427.39/ounce, fractionally higher quarter-on quarter and 9% higher than in the second quarter of 2004. In rand terms the price average was seven per cent higher than in the first quarter, in Australian dollars it was up by one per cent and Indonesian rupiah (the home of Freeport’s massive Grasberg mine, the world’s largest and back own to normal operations with 0.73 million ounces or 23 tonnes in the second quarter) the average was three per cent higher than in the first quarter.

The second quarter high was registered on 24 June at $440.55, while the low was $414.45 on May 31. The average sales price realised by producers in the quarter was measured at $419/ounce, a shortfall of roughly $8/ounce below the average spot price and two per cent down from the $426/ounce received in the March quarter (when spot averaged $427.35/ounce). Producers secured prices ranging from a low of $342/ounce to a high of $507/ounce, while the marked-to market value of the book, from those companies that report the data, was measured at a negative $4.7 billion, a 0.4% or $20.7 million increase on March 2005.

Although the deliveries in the second quarter were four times the level of the de-hedging in the first quarter of this year, the deliveries were in line with the maturity profile of the global book as it stood at the end of March. Assuming that this pattern is followed over the rest of this year, and on the assumption that there is no new hedging, buybacks or restructures then de-hedging for the full year should amount to roughly 9.0 million ounces or 280 tonnes, a drop of 35% on the 13.76 million ounces (428 tonnes) contraction in 2004. The delivery profile at the end of the second quarter thus suggested that there were 5.5 million ounces (172 tonnes) of scheduled commitments outstanding for delivery in the second half of this year. At the end of the second quarter the delta-adjusted hedge book consisted of 80% forwards, 19% vanilla options and 1% non-vanilla options, broadly unchanged from the corresponding period of 2004. Outstanding forwards amount to 43.71 million ounces (1,359 tonnes) while the delta hedge options position amounted to 10.83 million ounces 336.8 tonnes), of which 10.25 million ounces ((319 tonnes) were vanilla and 0.57 million ounces (17.8 tonnes) of non-vanilla products. This of course reflects the hefty restructuring that took place earlier in the decade as a result of the Ashanti and Cambior problems and shareholders’ demands for hedge simplification.

In nominal terms the hedge book at the end of the second quarter was composed as to 71% forwards and gold loans with 29% derivative contracts, as against 69% and 31% respectively at the end of the second quarter. This makes the hedge book relatively insensitive to the gold price (by definition, the options potions are more price sensitive than simple forwards). To give an example; an increase of $200/ounce in the gold price would result in only a 3% increase in the delta adjusted hedge book as it stood at the end of June, adding 1.52 million ounces or 48 tonne or one week’s global production.

Among the options-only position, a $200 change in the gold price would see the delta adjusted options book expand from 10.83 million ounces (337 tonnes) to 12.35 million ounces (384 tonnes), an increase of 14.0%.

A further breakdown of the options book shows that the net call delta hedge position dwarfed the net put delta hedge position, accounting for 88% of total, net puts seven per cent and non-vanilla five per cent. Sold calls outnumber purchased puts by approximately two to one, and also the implied delta against the sold call contracts is calculated at 0.83, while the delta against the purchased puts is calculated at 0.16. The bulk of the de-hedging in the options sector was attributed to a cut in the vanilla delta hedge position with the decline concentrated in sold call contracts, largely as a reduction in nominal positions. Newmont, Placer Dome and Western Areas were all important factors in this over the quarter; the largest individual contribution, however, came from Buenaventura as the company continued the hedge book restructuring programme initiated in January 2004, under which it is converting derivative contracts into simple forward sales. The conversion over the quarter of 0.42 million ounces (13.0 tonnes) of options into normal forwards resulted in a small net increase in the company’s hedge position.

GFMS uses the Brady Trinity Risk Management and Trading system to analyse the books of 93 mining companies. It pays attention to the “Big Four”, as does Mitsui, noting that these four companies (Barrick, Placer, AngloGold Ashanti and Newcrest) account for two thirds of the global hedge book in nominal terms. A simple summary shows that the largest change in exposure during the quarter was a 54% reduction in calls sold in the Australian sector, followed by a 32% drop in net vanilla options in Australia. The rest of the world, excluding North America and South Africa, was the next largest region in terms of reducing positions, while North America and South Africa were more circumspect.

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