A recent example of hedging by Macquarie is Catalpa which hedged...

A recent example of hedging by Macquarie is Catalpa which hedged around 300,000 ounces at $A1500. This occurred when the $A had sunk to around $US0.60 and was a reasonable refection of $A spot prices at the time.

If the hedge is sold forward Macquarie will arrange to borrow the 150,000 ounces of gold and pay the lease interest rate on that gold. Current 1 year rates are about 0.5%.

This gold will be sold on market and $US funds realised. Since the mine is in Ghana there would be little reason to convert to another currency. The $US funds would be placed in say US T Bills with a maturity spread matching the hedge delivery book.

The US T-Bill interest rate is a credit but the lease cost + Macquarie fees are debits so it is probably balances out and the gold price obtained on spot is around the hedge price.

If the gold price rises above the hedge price this ia a negative entry on mark to market.

Gold companies are getting out of hedges because of this impact on their reported results.

A better method is bought put options as this eliminates this issue. The disadvantage is that these must be bought by the Company and for 150,000 ounces the cost could be $US10 million.

However, it is a fixed sum and then get on with mining. I assume Macquarie prefers sold forward hedges as these require more management and generate higher fees.