St. LOUIS (ResourceInvestor.com) -- The world's third biggest gold producer AngloGold Ashanti [NYSE:AU] posted flat third-quarter headline earnings per share on Thursday but indicated willingness to buy out its gold hedge contracts prior to expiration. In doing so, the company would join the ranks of no. 1 Barrick and no. 2 Newmont with hedge closures and absolute confidence in higher gold prices moving forward.
“We would like more exposure to a rising gold price,” said AngloGold's new CEO Mark Cutifani in the company’s third-quarter presentation. “We’re positive on the gold price”
The spot gold price gained 7% in October alone after closing September in the high $730s. In just two months, gold has amassed 15% in gains, up nearly 25% so far this year. The spot price briefly touched $800 on Wednesday, while the December delivery contract recorded a $802.50 high on Thursday.
AngloGold has one of the largest hedge books at 10.58 million ounces of gold as at end-September, a rise of 1.83 million ounces from the previous quarter due to a $96/oz higher gold price. About half of the company’s hedges are due for closure within 3 years.
Last quarter, AngloGold Ashanti saw a reduction of 800,000 ounces, but made no official statements about further cuts or entirely eliminating its hedge book. In February, the company said it would continue delivering broadly in line with the delivery schedule.
Cutifani told listeners in the conference call that “I’m not a great fan of hedging” and the company will be considering ways to “improve our situation” in a way that is sensitive to shareholder value.
“It remains our intention to continue to actively manage our hedge book in a value accretive manner while seeking to reduce our overall hedge position,” he said. “We probably have a bit more than we’d like.”
Many gold producers increased forward sales when gold touched a 20-year low in 1999 to protect themselves against further declines. However, the world's top gold mining companies have accelerated their dehedging in recent years to take full advantage of higher gold prices.
In mid-September, Newcrest Mining Ltd. [ASX:NMC] sold A$2 billion ($1.6 billion) of stock to close its hedge book and repay debt. The company pre-purchased 2.3 million ounces at an average price of A$831 per ounce (US$685) - 2.5% below current market prices.
In early June, Newmont [NYSE:NEM] said it had closed its entire portfolio of forward gold sales, covering 1.85 million ounces at a cost of $578 million, originally committed to deliver the gold in 2008, 2009 and 2011 at prices of $381-$392 an ounce. The average gold price in May was $667.80/oz.
In early May, Barrick [NYSE:ABX] said it had exited all corporate gold sales contracts with the sale of 2 million ounces of gold at fixed prices that were 41% below current bullion spot prices. The company said it sold gold at an average price of $386 an ounce in the quarter, 28% lower than a year ago.
Gold Fields [NYSE:GFI] previously closed out the remaining 700,000 ounces of the recently acquired Western Areas’ hedge book at an average spot gold price of US$622.14/oz and a total cost of US$528 million.
The price of gold rose $100 an ounce in the July-through-September period. However, AngloGold received only $621/oz on average for each gold ounce sold, 9% lower than the average spot price for the quarter, due to its hedges.
“Obviously with gold prices performing as they have been, it is a drag on revenue and I expect [AngloGold] would like to lighten it,” said Matthew Turner, commodities analysts at Virtual Metals, “but obviously with a mark-to-market of negative $3.52 billion - at $745/oz, so it'll be more now - it's going to be expensive.”
Gold production for the third quarter rose by 6% to 1.43 million ounces, but cash costs rose 7% quarter-on-quarter to $357 an ounce due to wage increases, higher power tariffs, firmer prices for supplies, more royalty payments and stronger local operating currencies.
AngloGold said adjusted headline EPS for the three months to end-September, excluding non-realised financial effects from derivatives, was unchanged at 29 U.S. cents, or $81 million against $82 million in the corresponding quarter last year.
The company said earning was also offset by a once-off compensation and recruitment expense following Anglo American’s [Nasdaq:AAUK] exit from the company. In October, Anglo American sold 67.1 million shares in AngloGold Ashanti as part of its planned exit from the company, reducing its stake from 41.6% to 17.3%
AngloGold said fourth-quarter gold output would rise to 1.5 million ounces, with cash costs up higher at $364 per ounce, but earnings for that period would again be distorted by annual accounting adjustments for items such as rehabilitation and inventory.
The company also announced the purchase of the 15% minority interest in Iduapriem mine, in Ghana, resulting in the operation now becoming wholly owned.
“Quite frankly, it’s all about returns,” said Cutifani. “If we see better value in putting the money in assets [as opposed to dehedging], that’s where it will go.”
AngloGold shares closed down $3.15 at $43.30 on NYSE today, while spot gold fell an insignificant $1.50 to $790.20.
