Gold Miner Hedging Against Gold Price Drop: What It Means for Metal Buyers

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With gold prices over $1,600 per ounce, what gold miner/producer wouldn’t want to take advantage of gold’s decade-long bull run?

Turns out, at least one Australian gold mining company. Why? Call it a shrewd approach to commodity risk managment.

In order to manage his company’s commodity risk — namely, the risk of gold prices falling in the near future — Brian Rear, chief executive of Australia’s Millennium Minerals, is warming up to hedging of future gold prices just in case of a souring market, according to a recent Wall Street Journal article.

“I make no apology for managing our risk,” Rear told the Journal. “We don’t get emotional about it.”

The reason this is such an about-face: most gold producers have scrapped hedging their gold price risk, because they lost out on a lot of profit during these gold boom years. Barrick Gold, the largest producer, has a no-hedge policy — having lost $5.6 billion in earnings in 2009 because of the hedging contracts it had, according to the article.

Several other producers have followed suit, wanting the company and its investors to not miss out on, you know, making as much money as possible.

But What Does Hedging Mean For Metal Buyers?

Millenium Minerals’ Brian Rear, in employing his new commodity risk management strategy, is acting a lot like what savvy aluminum-, copper-, steel- and other metal buyers should be — that is to say, hedging their bets to lock in metal prices — but of course, Rear’s company’s rationale, process and potential outcome are a bit opposite.

For Rear is betting that gold prices will go lower in the future, against what the rest of the market is betting. For buyers, the reason to hedge is to protect themselves against higher future prices. Hedging goes both ways, and should be fully considered by any industrial metal buyer.

“Commodity volatility is the new normal, and more and more companies are realizing that it’s critical to have a comprehensive commodity risk management strategy and technology platform in order to maintain profit margins,” Michael Schwartz, chief marketing officer of Triple Point Technology, has told MetalMiner.

“Volatility in the price of raw materials has had a huge impact on many industries, but manufacturing companies, especially the beverage and dry packaged goods companies, have been especially hard hit,” Schwartz continued.

“They are embracing risk management strategies, including hedging in large numbers, because they’ve realized it can make the difference between sinking or swimming in a very competitive marketplace.”

For precious metals producers, Brian Rear is in the minority. But if you’re buying industrial metals for your company, there are increasingly fewer reasons for you to be in the non-hedging majority.

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