Should Gold Miners Be Hedging Again? Falling Prices Are Food For Thought

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Precious Metals

Gold producers may tap several key strategies for sustainability in a low-gold-price environment, such as more M&A, cost cuts/layoffs/production cuts, and restucturing their portfolios for more flexibility – not to mention hedging. (Continued from Part Four.)

On the flexibility point, upcoming projects could face delays as producers feel the need to have more flexibility in the allocation of available capital in a low-profit environment.

Barrick Gold Corp., for example, has suspended its Pascua Lama project in Chile in favor of more a prudent resource allocation. Besides these, we could also see a reduction in miners’ engagement with contractors. Rationalizing working capital needs through group procurement and supplier negotiations, along with more efficient inventory management, are likely to gain management attention in coming months.

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What about high grading, is that an option?

High grading implies focusing on the extraction of high-grade deposits, which brings down short-term operating costs significantly, increases cash flow and makes operations sustainable in a low-price situation.

However, this procedure could also significantly bring down the life of the resource, as the parts of the mine containing low-grade deposits may become uneconomical to mine, due to higher extraction costs (than prior to high grading), even when the price of gold returns to higher levels.

Having said that, there would some miners who may risk shortening mine life and opt to be in favor of tapping their higher-grade resources so as to reduce their unit costs and increase cash flow.

Hedging?

The decade-long bull market for gold greatly diminished the need for producers to hedge their output.

Gold producers preferred to sell their output in the spot market, due to a constant expectation of a further rally in gold price. Also, gold is considered as store of value and imperishable, which had provided an upper hand to producers in the gold supply market.

However, the past decade also saw these gold producers make huge investments in mine expansions, construction of new mines and exploration for new resource discoveries, making them incur significant amounts of debt.

With the gold price dropping to levels near long-term production costs, gold miners may start to re-consider hedging their output. These hedge contracts could serve as collateral for some highly indebted miners, also facing negative cash flows to procure working capital loans, which could help them to keep their operations running.

Up next: Will production costs set a long term floor price for gold?

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MetalMiner welcomes guest contributor Moonmoon Basu, a senior research analyst at Beroe Inc., tracking base metals & precious metals for over two years and specializing in price forecasting. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight.

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