St. LOUIS (ResourceInvestor.com) -- According to Virtual Metals’ Mitsui Gold Hedging Report, the world's top gold mining companies accelerated their dehedging in the second quarter, closing out forward contracts totalling 5.4 million ounces. No. 1 and no. 2 producers Barrick and Newmont felt the immediate impact in their quarterlies.
Newmont [NYSE:NEM] reported on Wednesday a net loss of $2.06 billion (-$4.57 per share), compared with net income of $161 million ($0.36 per share) for the second quarter of 2006, primarily due to the elimination of its hedge book and the write down of its merchant business. The company's last net loss was in the first quarter of 2002.
In early June, the company 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.
The impact of that hedging elimination totalled $460 million in the quarter, while the write-down of the value of its merchant business came to $1.67 billion. On a continuing-operations basis, the company lost $406 million, or 90 cents per share.
Excluding one-time items, Newmont earned 18 cents per share. Analysts surveyed by Bloomberg expected earnings of 22 cents in the quarter, while Reuters Estimates forecast earnings of 21 cents per share. Thomson Financial expected earnings of 22 cents per share on revenue of $1.1 billion.
Revenue grew to $1.3 billion from $1.29 billion in the year-ago period. However, the cost of mining and selling gold rose 45% to $433 an ounce, partly because of gains in the Australian dollar.
Gold sales totalled 1.25 million ounces compared with 1.38 million ounces last year. But Richard T. O’Brien, President and CEO of Newmont, affirmed a forecast that the company will sell 5.2 million ounces to 5.6 million ounces of gold this year at cost of $375 to $400 an ounce.
“With the elimination of our gold hedges, Newmont is now the world’s largest unhedged gold producer,” added O’Brien.
The world’s largest ‘hedged’ gold producer, Barrick Gold [NYSE:ABX; TSX:ABX], although still posted earnings, reported lower profits in the second quarter after eliminating its gold hedging contracts.
The company reported after market close on Wednesday that it earned $396 million (46 cents per share) for the three months ended June 30, compared with profits of $459 million in the same period last year.
In early May, Barrick said it had exited contracts of 2 million ounces of gold at fixed prices that were 41% below current bullion spot prices in the first quarter. The company said it sold gold at an average price of $386 an ounce in the quarter, 28% lower than a year ago.
Although most of this was included in Q1, reducing net income by $557 million and leading to a net loss of $159 million (-18 cents per share), an additional charge of $66 million (-8 cents per share) was accrued in Q2 with a previously scheduled closure of 500,000 gold sales contracts.
Stripping out the hedging charge, adjusted earnings were $462 million, or 54 cents a share. Analysts polled by Reuters had expected a profit of 43 cents a share, while Bloomberg put earnings at 42 cents. Fifteen analysts polled by First Call/Thomson Financial expected the company to earn 42 per share on average.
Barrick reported operating cash flow of $336 million with sales of $1.6 billion. However, second quarter gold production fell to 1.96 million ounces at total cash costs of $345 per ounce, compared with 2.09 million ounces at total cash costs of $280 an ounce for the prior-year period.
The company produced 101 million pounds of copper at total cash costs of $0.77 per pound during Q2 2007 versus 100 million pounds at total cash costs of $0.76 per pound in the prior year quarter.
Barrick said it remains on track with its 2007 full year guidance of producing 8.1 to 8.4 million ounces of gold at total cash costs of $335 to $350 per ounce and 400 million pounds of copper at total cash costs of about 90 cents a pound.
Greg Wilkins, President and CEO of Barrick, said the company remains positive on the outlook for the gold market moving forward, as seen with the closure of its forward gold sales contracts.
“The ability to capture spot prices, combined with our tight focus on cost control, is generating strong margins,” he said.
Over the last 5 years, Barrick has eliminated over 22 million ounces of Barrick, Placer and Homestake hedges at prices significantly below current prices. The company still has more than 9 million ounces of hedged gold to help finance its Pascua-Lama and Pueblo Viejo projects, which are required to be covered beginning in 2009.
Other major hedgers in the second quarter include Lihir Gold [Nasdaq:LIHR], which closed out their hedge book of 1.4 million ounces, and AngloGold Ashanti [NYSE:AU], which saw a reduction of 800,000 ounces.
AngloGold Ashanti, the world’s no. 3 gold producer, reported on Tuesday earnings of $82 million for the quarter ending in June, down from $98 million in the quarter ending in March, despite a 2% increase in production at 1.35 million ounces.
Additionally, Buenaventura [NYSE:BVN] cut 500,000 ounces, Harmony [NYSE:HMY] cut 200,000 ounces (entire book), Emperor Mines [ASX:EMP] cut 150,000 ounces (entire book) and Newcrest [ASX:NCM] cut 150,000 ounces. Virtual Metals estimate 31 other companies made cuts totalling another 700,000 ounces.
In percentage terms, hedging was reduced by 15% - the largest decrease since Q3 2001 - to 31.2 million ounces. Only four companies added to their hedge positions, with Western Goldfields [TSX:WTI] the only one to do so substantially with a project-finance hedge of 400,000 ounces.
However, a slowdown in dehedging seems inevitable for the rest of the year as Newmont, Barrick and Harmony have all concluded stated forward sales. AngloGold Ashanti still has 8.5 million ounces, while Newcrest has 4 million ounces, but both are expected to reduce their hedge book broadly in line with their delivery schedules.
“Looking ahead to the rest of the year, however, most of the major companies have little dehedging planned and this support could consequently falter,” said Edel Tully, Head of Precious Metals Research at Mitsui Global Precious Metals.
Even so, there is at present no indication of any major companies looking to place price-protection hedges of the size other companies are dehedging.
Jon Nadler, analyst for Kitco Bullion Dealers, wondered how much this dehedging was supporting the market in Q2.
Dehedging can be seen as either adding to demand or removing supply from the market. When companies decide to close out hedges, they can either buy gold in the open market for early delivery or they can use mined gold.
Nadler noted that gold did try to overcome the $690's twice in April-May but then started to slide towards the $655's in June.
“Indeed, jewellery and investment support better prove to be quite robust after August draws to a close and then also after the new central bank sales agreement year commences, in late September,” he said.
Gold closed Thursday's session in New York rising $0.80 to $664.60. Newmont was last trading down 15 cents at $41.44, while Barrick was up 49 cents at $33.19.
