It’s curious, isn’t it?
Miners saw the fall in metals prices and most of them reacted promptly by cutting capex, in some cases production, and wherever possible, cash flow.
Cutting back on capital expenditure is not a short-term option. It can take years to reverse even a project slowdown, and to resurrect a mine project that has been closed can take five to 10 years. So if miners are battening down the hatches, they must be confident prices are not going to come back anytime soon, if you like that the super cycle is, at least for now, over.
If that is the case, it begs the question: why have producers not hedged their production at what could prove to have been historically high prices?
Well, it seems some did. Curiously, silver producers have been very active in hedging their forward sales, whereas gold producers have not. That could be explained by the bad experiences of major gold producers a decade or so back when firms like Barrick Gold and AngloGold Ashanti spent billions buying themselves out of fixed gold sales.
As spot gold prices soared from $250 an ounce at the end of 2000 to 2011’s record $1,920.30 an ounce, hedged gold producers lost billions as they bailed out of the contracts. According to a Reuters article, AngloGold’s move to scrap its hedge book – which stood at 11.3 million ounces in early 2008 – cost it $6 billion, but still saved the company a further $4 billion.
One can understand the scars from that must run deep, but contrast the near-universal objection to hedging among gold producers (one or two exceptions mentioned later) to the position of silver producers. Silver miners began hedging en masse in late 2010 and early 2011, as silver prices skyrocketed from $18 to $49 in the space of eight months.
During that time, the total amount of metal hedged more than quadrupled, according to Thomson Reuters GFMS data reported in a Financial Times article.
According to the article, Volcan has hedged 6.7 million ounces in 2013 and 2014 with a minimum price of $30; Peñoles has hedged 6.6 million over the next four years at a minimum price of $28.67; Minera Frisco has secured a minimum price of $23.11 for 21.6 million ounces in 2013; and – get this – Barrick Gold has hedged 65 million ounces over the next six years with a floor price of $23.
Clearly, Barrick Gold is hoping for a comeback on gold, but is not so confident on silver!