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Gold Hedging

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April 21, 2008 – Comments (0)

It takes work to figure out a gold stock has hedged production, contracts to sell gold at a set price.  Barrack has quite a bit of hedge on production from mines not yet produced.  They've put out specially worded press releases, "No Producing Mine Hedged," which easily misleads the average investor. 

Anyway, I saw a press release about how much gold is hedged altogether, 835 tonnes.

"AngloGold Ashanti's book, at 10.39 million ounces, thus constitutes 39% of the global total, with Barrick accounting approximately for a further 30."

Barrick likely will have to fill its obligations at a loss.  I believe its hedges are between $3-400/oz and mining costs have gone up so much it is doubtful it will even be able to break even at that price.  If you take out by-product credits, which is applying other metals mined to the costs to reduce the average and instead did proportional accounting I suspect the average cost to mine an ounce of gold is hitting $600/oz, and more wouldn't surprise me.  I've seen several mines working at a loss when gold was $6-700/ounce.

The problem is that the average grade being mined is declining and that has huge price increase implications.  I did an analysis of what declining grade would do to costs taking out all other factors in my post "Declining Grade of Gold - Are the Cost Disadvantages Linear?

If you look closer at gold stocks every year when they post their reserves/resources the average grade is usually declining.  Once in a while they get lucky and find a deposit that raises the average, but for the industry as a whole it is declining.  And for quite a few they have grade in the 1g/ton range.  The fudge factor on costing as the grade gets lower is enormous. 

If you look at the second graph in the above post the under 5g/ton is where many gold producers are working.  So, you have cost increases hitting gold producers in several places, exchange difference if they are located in different countries, declining grade of gold, rising standard of living in those other countries which demand higher wages and input costs are increasing.  They have to build new mines and up grade mines all the time.  They are far more affected by the increased price in base metals then say a factory that will still be there in 20 years.  Mining companies have to constantly put down new infrastructure to get to the deposits and those costs are way up.

While I'm on the topic, a lot of gold companies have increased their reserves by lowering the cut off grade for economic feasibility as the price of gold has increased.  That is applying a linear cost increase model to exponentially increasing costs.  Some of them have an "economically viable" cut off grade as low as 0.3g/ton in their reserves/resources.  It simply isn't true.

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