The latest gold mine hedge book analysis from Société Générale concludes that the delta-adjusted global producer hedge book was reduced by 128 tonnes in the first quarter of this year to stand at 706 tonnes at the end of March, driven by repurchases by AngloGold Ashanti and the conversion of Barrick's project gold sales contracts from fixed to floating prices.  The book was therefore reduced by 15% and, were this rate to be sustained over the course of this year then the book would contract by 512 tonnes, leaving just 322 tonnes at year-end.  As things stand, the delivery profile calls, in theory, for total de-hedging this year of something like another 87 tonnes, taking the minimum total for this year to just over 200 tonnes.  The study notes, however, that this does not include unscheduled buybacks, deferrals, intentions to de-hedge or fresh hedging.  Several producers have already outlined their intentions for more de-hedging during 2008 and it therefore looks as if this 200 tonne-plus figure is very much a minimum.

In the vanguard is AngloGold Ashanti, whose Chief Executive Officer Mark Cutifani was quoted in the company's March quarter results presentation to the effect that he aims to reduce the company's hedge book by 194 tonnes by end-December 2008.  Given that AngloGold's hedge book stood at 288 tonnes at the end of March, this obviously implies that AngloGold will take at another 94 tonnes or thereabouts out of the market over the rest of this year.  Newcrest, meanwhile, remains committed to removing all of its outstanding commitments by this June.  On the basis of company statements, and the reduction of the book by 16 tonnes during the March quarter, this suggests a reduction of somewhere between three and nineteen tonnes during this quarter.  Sino Gold has recently announced the intention to close out its remaining forward contracts, while OceanaGold is currently seeking to reschedule 2008 commitments. This requires approval from counterparty banks and Board of Directors, but would account for a deferral of four tonnes of the 2008 profile.

These proposals, combined with Resolute Mining's intention to enter into a bought put programme, along with other unconfirmed activities in the scheduled delivery profile, would give a potential year-end dehedging figure of around ten million ounces, or just over 311 tonnes.  The forecast comes with the warning, however that this does not account for further buybacks, deferrals or fresh hedging noting that, for example another weighty conversion of Barrick's project gold sales contracts from fixed to floating, or indeed the opposite, would significantly alter these figures.

The group remains of the view that, barring emplacement of project hedges, there is currently good  reason for miners or investors to change their attitudes towards hedging and thus it expects another reasonably strong period of de-hedging in the June quarter.

The GFMS analysis uses the Brady TrinityTM risk management system, under which each mining company's individual trades are input into the system.  Each option trade is entered by mid-year of expiry, while non vanilla products (e.g. convertible forwards) have been broken down into the constituent options, allowing for accurate assessments and valuations of each company's hedging programme as well as the modelling of the delivery profile of the hedge book.

The results of the study for the first quarter of this year show that the majority of the cuts in the hedge book in the quarter came from the reduction in forward sales positions.  This of itself is not surprising, given that at the end of December 2007 forwards accounted for approximately two-thirds of the delta-adjusted book.  A the end of the March quarter forwards comprised just less than that amount at 65% of total, or 458 tonnes, with options comprising the balance of 248 tonnes.  Over 75% of the reductions came from just three companies; AngloGold Ashanti, Barrick and Buenaventura, who took off 100 tonnes between them.  There was, as there had been in the previous quarter, an extremely low level of fresh hedging, with the most prominent increase being an expansion of just one tonne to St. Barbara Mines' option position as a result of in increase in bought puts.  Most producers' realised cash margins managed to keep pace with the increase in the average spot price, but the higher price at the end of the period meant that the marked-to-market value of the book was dragged further underwater.  The realised cash price over the quarter averaged $899/ounce, against a spot price average of $924/ounce.

The study includes its usual options sensitivity matrix, which measures the impact on the delta-adjusted book of both price and volatility changes.  As always this makes for interesting reading; by way of just one example, an increase in the gold price of $100 from the quarter-end price of $933.50/ounce would increase the book by 110,000 ounces or 3.4 tonnes, while a $100 drop would reduce it by 190,000 ounces or 5.9 tonnes.  This relative insensitivity to price movement is due to the fact that the majority of bought puts were deeply out of the money at the end of the quarter, and thus carrying a delta of close to zero, while many call options were still deeply in the money and thus carrying a delta of close to one.

The delta-adjusted hedge book is thus likely to remain relatively inflexible, barring an inconceivably severe downward swing to the end-quarter gold price.  After the activity in the past few days it is arguable that nothing is inconceivable in this market, but the $60 drop experienced over the past week would only affect the option book by less than six tonnes.

At the end of the first quarter of this year the hedge book, at 706 tonnes, was equivalent to just three months' gold mine production.  By the end of this year it looks likely to be substantially lower than that.