The latest quarterly hedge book analysis from Société Générale (compiled by GFMS Ltd) produced the remarkable result that net dehedging in the first quarter of this year was just three tonnes. Not surprisingly, given the levels of the gold price during the quarter, there was very little active de-hedging, with just one significant buy-back, coming from AngloGold Ashanti as the company continued to restructure its hedge portfolio.

Thus, the net outstanding gold loans and forward position actually increased very fractionally, by just 10,000 ounces to 10.94 million ounces or 340 tonnes while the delta-adjusted options position dropped by just 110,000 ounces to 4.75 million ounces (148 tonnes), leaving the overall book at 488 tonnes, a drop of three tonnes from the end of 2008. The nominal book (i.e. not adjusted for delta-hedging) stood at 598 tonnes, down from 614 tonnes at the end of 2008.

Project financing is continuing to work its way into the market. With risk one of the bêtes noires of the current financial environment, banks are understandably looking for hedging programmes for project finance and the study singles out the finalisation of two in the first quarter of this year; Catalpa Resources and Apollo Gold. The former involves a facility to the Edna May gold project in Western Australia, which entailed a forward sales of 11 tonnes of gold at a fixed flat rate at what has turned out to be the record high Australian dollar price to date of A$1,544/ounce. The latter is a $70 million project finance agreement for the Black Fox project in Canada (which came on stream during the second quarter), and includes an eight tonne programme of forward sales over the four year term of the facility.

While Hochschild Mining put small fresh forwards sales into place, the study also identifies other companies which have increased their net options hedge position, involving both puts and calls. The overall decline in the delta options portion of the book was due to a decline in the bought put position through the expiry or exercise of options, along with an increase in the sold put position, with the latter due to activity from AngloGold Ashanti. The study includes its usual price and volatility sensitivity matrix, noting that the reduction of the net put position in the global book now means that a large fall in the gold price would have a greater impact than hitherto on reducing the options book. A $200 fall in price, for example would see the end-Q1 book contract by some 13% (20 tonnes) as a result of delta effects on the net call position.

Producers' realised prices increased sharply on a quarter-on-quarter basis, rising from $783/ounce to $897/ounce, compared with an average pm fix for the quarter of $908/ounce. This is a narrower differential than has been recorded in some quarters in the past and is partially due to the fact that a number of hedge positions that had been due to mature in the first quarter of 2009 had in fact been closed out earlier, in the fourth quarter of 2008.

The global value of the marked-to-market book was steady in the first quarter at minus $5.8 billion, a level last seen in the latter half of 2005. Furthermore, new hedges seen in the quarter were at levels much closer to spot than many of the positions already outstanding, and therefore having needing minimal adjustment when market to market.

The delivery schedule at the end of the quarter suggested that there were just 44 tonnes of outstanding contracts due for delivery during 2009, while the figure for 2010 looks to be closer to 85 tonnes. This of course does not include any unscheduled buy backs or fresh hedging. The majority of the book is concentrated in the hands of just two companies; AngloGold Ashanti and Barrick Gold.

The bank expects mining companies to continue to remove hedge cover at a higher rate than that suggested by the delivery profile ands also does not believe that the market is heading for a fully-fledged return to any kind of meaningful wholesale hedging. Remember that the vast majority of fresh hedge positions in the first quarter of this year were related to project finance, and mining companies' managements remain keenly aware of investors' desire to seek upside gold price exposure through the mechanism of equity investment.