The company is saving the Yakut asset with hedge contracts.
Polyus Gold may become the Russian second gold miner after Petropavlovsk, hedging its sales amid low market prices. The company is considering the possibility of a two-year hedging of the output from Yakut field Kuranah, fearing otherwise to invest about $20 million every year in order tokeep the company running. The other players, some of whom had suffered losses due to hedging, do not have such plans.
As it has been known to Kommersant", the Polyus Gold is considering the possibility hedging the gold sales from its Yakut field Kuranah. In the first half of the year, the company reassessed its assets and, in particular, wrote off $138 million of Kuranakh’s value due to the fall in gold prices.
The Kommersant’s sources said that the prospects of Kuranakh confuse the company: in 2014 the total cost of the deposit will be $1,200 per ounce in the baseline scenario and up to $1,400 in inflationary scenario, which, given the pessimistic forecasts for the gold prices can bring to generation of negative cash flow.For example, according to Bloomberg consensus forecast, with the current spot price of $1,314 an ounce, the average gold price in 2014-2015 will be $1,296 an ounce.
If Polyus would nothedge deliveries, in the event of implementation of the inflationary scenario, it will have to spend on maintaining of Kuranakh about $20 million a year, said the Kommersant’s sources. So there are thoughts at Polyusabout hedging of Kuranakh deliveries for two years: the production volumes for this time should amount 257 thousand ounces of gold ($334 million at current spot prices), or 8% of the company's total production. “No decision has been made yet, a hedging option may be considered, depending on the dynamics of the gold prices," said in Polyus.
The first and so far only Russian gold miners reacted to fall in gold prices was Petropavlovsk: in February, the company hedged the delivery of 400 thousand ounces until March 2014, priced at $1,663 per ounce, and in May announced that it additionally hedged 96 thousand ounces for April-June 2014 at $1,408 per ounce. Canadian Kinross also hade hedge contracts at the Kupol field in Chukotka, but they were concluded by the former owners of the field.
The gold miners, interviewed by Kommersant’s take some time before following the example of Petropavlovsk. Polymetal’s representative said that the company does not consider the possibility of concluding hedge contracts astheydeprive of the chance to take advantage of possible price increases (so-called upside), bear tax risks, and also banks charge a commission for their conclusion, explained at Polymetal.
A source close to Highland Gold, said the company was “unlikely to fall back upon hedging”. Historically, the companies hedged during periods of historically low market prices, but when prices started to rise, hedging brought losses, said in Nordgold. In particular, Polimetall (Polymetal was created on its base) encountered with such situation, as well as Kinross and Barrick Gold. On the other hand, according to Nordgold’s representative, insurance against the risk of lowering of the gold prices can justify itself if the company has a significant investment program and problems with the generation of free cash flow. As it is not the case with Nordgold, so the company “does not see the need for hedging”.
Alexander Litvin of TKB BNP Paribas Investment Partners agree that hedge is “not unreasonable” for companies with a high debt load and a large capital investment program, as in Polyus Gold. “Hedging facilitates negotiations with the banks and reduces the risks of volatility,” explains the analyst.
Sergey Donskoy with SocieteGenerale said that if the hedging allows Kuranakh wait out the period of low prices, then it is a good option for Polyus, even without considering the potential upside. He added, that the market has information that Polyus is considering the sale of this field - in this case, the asset must be maintained in operative condition, because it is more difficult to find buyers for stagnant facility.