Banks demand a return to hedging

Johannesburg - Risk-averse banks have returned to requiring mining companies to hedge or sell forward their production at guaranteed prices to ensure there is no default on loans in the economic meltdown wreaking havoc in the commodities sector.

Securing finance during the bull run in commodities that ended in the middle of 2008 was a lot simpler. That has changed with the dramatic reversal in metal prices as demand dropped as the global economicy slowed.

The latest company to unveil a hedge book is Platinum Australia, following the likes of diversified South African mining group Metorex, which has restructured its forward sales of copper from its delayed Ruashi project in the DRC where costs have ballooned.

Metorex has had to, in very tough markets, restructure debt repayments, incur fresh debt and issue shares to raise R922m towards completing Ruashi.

This trend stands in stark contrast to the headlong rush to remove hedge positions in the gold industry where investors are demanding exposure to a buoyant bullion market.

The gold sector has cut its forward sales to 15.5 million oz from a peak of 102.8 million oz in the third quarter of 2001. The VM Group forecast a further decline this year of four million oz.

Platinum Australia has hedged roughly 27 000 ounces of platinum over five years at average prices of around $1 500/oz. The current price is sitting at $1 050/oz.

"Hedging has come back into favour quite a lot in the banks," said Reg Demana from Nedbank Capital's Corporate Finance division.

"While we were happy to give them (companies) exposure to the spot prices a few years ago, now we are returning to the hedging days," he said. "We'd rather hedge at least whatever is required to cover our own service costs and capital repayments, leaving them with the rest."

Platinum group Ridge Mining closed a favourable platinum hedge book in February, generating R541m towards reducing debt and clearing the way towards raising money to complete its delayed Blue Ridge platinum project.

Ridge put in a hedge for 20% of its production in May 2008 after the platinum price reached a record high above $2,000/oz in March.

The platinum price has subsequently fallen out of bed and is trading around $1 :050/oz. Ridge hedged its ounces at $1 800/oz.

Gamble doesn't pay off

However, hedging can also go wrong. Examples abound of companies caught offside with their hedge books. Australian miner Sons of Gwalia was crippled and London-based Ashanti Goldfields, which was taken out by AngloGold, was brought to its knees by onerous hedge books.

South African junior Pamodzi Gold inherited a hedge book after buying operations from Bema Gold, which knobbled any attempts by the company to make a success of its business.

Pamodzi's hedge stands at some 150 000 ounces remaining through 2012 and requires the company to sell its gold for $350/oz compared to the current gold price of $900/oz. It's cash costs far exceed the hedged price.

Whether Platinum Australia will have the same success as Ridge or an onerous hedge book like Pamodzi remains to be seen.

"Hedging can be positive, but it's like gambling. It's not conducive to the culture of operations and not very desirable," an analyst told Miningmx.

- Miningmx.com

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