The latest Société Générale global gold mine hedge book, compiled independently for the bank by GFMS Ltd., records that net producer de-hedging has continued to decelerate. Dehedging in the fourth quarter was at the slowest rate in the year and as the rate of dehedging fell away in each successive quarter of the year. The rate had picked up in the first quarter of 2008 to the highest since the second quarter of 2007, and completes three years of relatively strong dehedging activity. At the end of 2008 the outstanding delta-adjusted hedge book stood at 15.5 million ounces or 483 tonnes, a fall of 11.5 million ounces or 358 tonnes against year-ago levels, the third consecutive year of strong de-hedging.Net hedging was first recorded in the market in 1984, when there was net accelerated supply of 13 tonnes and after increasing for 16 years, the global hedge book peaked at 3,064 tonnes in 2000. It has subsequently contracted by 84% in just over eight years. This study notes that the existing delivery profile calls for a 60-tonne reduction in the global hedge book in 2009, with approximately 70 tpa thereafter through to the end of 2012, which would leave the outstanding book, assuming all other conditions were equal, at a delta-adjusted 221 tonnes. The point is made however that this is too theoretical an approach and that with gold equity investors still seeking exposure to gold's upside mining companies are expected to accelerate their dehedging where possible - although the reduced size of the book reduces the scope for widespread cuts. If the average run-rate over the past nine years were to be sustained in the near future then the existing book would be eliminated within eighteen months, but this is not a likely proposition and a marked slowdown in hedge buybacks is much more plausible.The nominal hedge book stood at 605 tonnes at the end of 2008, of which outstanding gold options comprised 272 tonnes or 45% of the total number of contracts constituting the book. This was a fall of 24 tonnes for the end-September position, largely due to a contraction of the net put position, as a result of the expiry of bought put positions and an increase in the total sold put position. The delta-adjusted options book stood at 4.82 million ounces or 150 tonnes and the study contains its usual matrix of sensitivity of the fourth-quarter options book as at the end of the past quarter. This shows that, for example, a $100 increase in the gold price would see the position increase by just two tonnes to 152 tonnes.Activity in the fourth quarter saw just 48 tonnes removed from the global producer book, while in nominal terms (i.e. not adjusted for options delta) the book contracted by 66 tonnes. Producers' realised prices average $780/ounce for the quarter compared with a spot average for $794.76, so that the realised price was just 2% below the spot average. The marked-to-market liability of the book contracted to negative $4.8 billion, a reduction of $0.6 billion from the previous quarter. Forward positions and gold loans contracted by 11% to an outstanding position of 332 tonnes, with the delta-adjusted options position fell by 4% to stand at 150 tonnes.Activity in the fourth quarter was concentrated among four main companies. Once again AngloGold Ashanti and Barrick Gold were the prominent de-hedgers, and accounted for more than 239 tonnes between them over the year as a whole, or roughly two-thirds of the year's activity. They still hold the largest hedge books, also comprising two-thirds of the outstanding global book between them. Kinross Gold and Mineral Deposits were other notable companies to reduce their hedge cover.Fresh hedging potential still has a couple of constraints to address. The first is the established investor-aversion to hedging, which will continue to be an important feature in companies' risk management decisions; and the second is that current market conditions are less favourable for hedging now than, for example, twelve months ago and a flattening of the forward curve has vastly considerably diminished the incentive to hedge.Gross hedging in 2009 is therefore expected to be limited, and contained to one of three alternatives. Firstly; risk cover required by counterparty banks within project finance programmes; secondly active management of hedge positions (e.g. Mineral Deposits' removal and renewal of forward sales positions); thirdly, price protection strategies developed where company management has an actively pro-hedging mentality despite investor opinions - although it should be noted that these are in the minority within the gold sector.
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