Ann: Corporate Presentation, page-16

Just to add to the discussion - The article below is from the AFR August 2019.
The more you hedge the more you become a contract manufacturer will all the risks involved in that business on low margins. Make hay when the sun shines for a the rainy days. IMO

Van Eck sees a 'global bullmarket in gold'

PeterKerResourcesreporter

Aug 5,2019 — 12.00am

One ofthe world's biggest gold investors has urged Australian miners to resist the temptationto lock in record prices, saying the rally in the precious metal was justgetting started.

NewYork-based VanEck's call to resist price hedging has been met with feistyresistance from local risk advisers and gold company executives, who defendAustralian miners missing up to $600 per ounce of profit margin because ofprice hedges locked in years ago.

Thedebate comes as Australian-denominated gold prices reached record highs onFriday of $2132 per ounce, and as the gold industry descends on Kalgoorlieon Monday for the annual Diggers n' Dealers conference.

JoeFoster, who picks gold stocks for VanEck's 63-year old International InvestorsGold Fund, said Australian gold miners are generally well managed but areunusually prone to locking gold prices into multi-year hedge arrangements.

"Australianshave more of a propensity to hedge than their North American counterparts. Ibelieve it is very possible we could be in the early stages of a global bullmarket in gold, and I would hate to see companies hedging away theupside," he told The Australian Financial Review.

"Thatis a message [to Australian miners]: don't over-extend your hedge book in thismarket."

Hedgingwas deeply unfashionable in the first decade of this century as price hedginglocked several big miners out of gold's 10-year rise from $US250 per ounce in2001 to $US1900 per ounce in 2011.

But manyAustralian miners resumed hedging around 2013 when gold lost suddenly lostabout 30 per cent of its value through the Australian winter of 2013.

But theprice of the precious metal is rising sharply amid trade tensions andfalling bond yields. Gold was fetching $US1433 per ounce on Friday, whichequated to a fresh record above $2100 per ounce in Australian dollar terms.

Locking in certainty

Noah'sRule managing director Sean Russo, who advises gold miners on hedging, said itshould be used to deliver a degree of certainty to a business around debtrepayment or dividend payments, not simply as a punt on the future trajectoryof gold prices.

SeanRusso, Noah's Rule managing director: ''Hedging is part of a sensible businessplan." Louise Kennerley

"Ialways caution our clients from ever talking about locking in prices becausethey are great prices, because that implies you know where the price is goingand nobody does," he said.

"Hedgingis part of a sensible business plan delivering a company that is growing,developing, exploring and in many cases paying a dividend.

"Theaverage hedge price locked in by most of our clients is approaching about $1800per ounce and people saw that not as a high price necessarily, but as a goodoperating margin.

"Mostgold producers have somewhere between six months' and one year's productionhedged, spread somewhere over the next two to three years."

Mr Russosaid investors would face more dilutive equity raisings over the cycle ifminers did not hedge a portion of their gold production.

"Historically,Australians have done more hedging because they behave like owners and they areinterested in maintaining a tight share register and they see it as adiscipline in their business to help their business survive through thecycle," he said.

"InNorth America, they tend to more think they are running a leverage play on gold... so they are employees and they tend to dance to the tune of the fundmanagers, who might only represent 15 per cent or 20 per cent of their totalequity."

Missing profits

Hedgesstruck several years ago by Regis Resources have the company selling a portionof its gold at about $1500 per ounce.

Regis'new managing director Jim Beyer, who was not in charge when the hedges werestruck, said the company was considering striking new hedge agreements giventhe strength of gold prices at the moment.

"Weare obviously looking quite carefully at what the options and the opportunityis for us to add hedges in, particularly at the moment, pricing, you know it isvery tempting," he told investors on July 23.

"Wedon't have a fixed strategy that we're working to, we're still thinking aboutthat."

ResoluteGold chief executive John Welborn said his company viewed hedging in the sameway a middle-aged couple with a mortgage might view their life insurance.

JohnWelborn, managing director of Resolute Mining: "We look at the payback ofthat capital and make sure some of the payback period is protected." CarlaGottgens

"Hedgingis around debt and development funding, so we have put in place hedges onRavenswood and Syama [mines] when we are applying capital to an asset. We lookat the payback of that capital and make sure some of the payback period isprotected in terms of price," he said.

"Ina simplistic way, I would liken it to life insurance for a middle-aged couplewith a mortgage, the moment you have got the million bucks in superannuationand the kids are out of home, there is no need to have life insurance."

EvolutionMining currently sells about 85 per cent of its gold at the daily market price,and the remainder at prices agreed under hedges.

Executive chairman Jake Klein told investors last month that hedges helped to ensure that some of Evolution's less profitable assets, such as Mt Rawdon, could be viable in their own right rather than be subsidised by Evolution's flagship assets, like the Cowal mine in New South Wales.

"Wewould be willing to go up to 20 per cent or 25 per cent [of production hedged]if the need is there, but right now, as we have moved to net cash, we're makinggood money across all of our sites, we don't see a need to lock away morehedging," he told investors.

Related

'Wonderful problem': Evolution bosses flag dividend windfall

SaracenMineral Holdings has been one of the great success stories of the Australiangold sector over the past seven years and has hedged some of its productionthrough a period that has seen its shares increase 37-fold.

"Wewere doing hedging when it was not funky back in 2012, which enabled us tounderpin the Thunderbox acquisition because without it we may have been alittle more circumspect," said Saracen managing director RaleighFinlayson.

SaracenMineral Holdings managing director Raleigh Finlayson: "We want to makesure that in five years' time if we wake up and the gold price is lower we willbe in a better place." Dominic Lorrimer

MrFinlayson had been managing director of Saracen for just a week in 2013 whengold prices began a 30 per cent slump in the space of three months.

He saidthat initiation had left him determined to not be caught out by the nextprice collapse, and hedging was part of being prepared for that.

"Weare looking at opportunities through hedging and those sorts of things to makesure that in five years' time if we wake up and the gold price is lower we willbe in a better place," he said.

"Wefundamentally hope for the best and plan for the worst; that is the only way wecan ever run our business which is tier two, bulk, low-grade assets.

"Itis fantastic at the moment but we are not resting on our laurels expecting itto be where it is forever – we are expecting it to go down and we plan ourbusiness around that."

Gold Roadpoured its first gold from its Gruyere project in the final week ofJune. The company has hedged about 33 per cent of its forecast goldproduction over its first three years of operation at $1836 per ounce.

"Weas a business considered such as move prudent from a risk management point ofview. It meant we had cover for our operating and corporate costs, couldmaintain our exploration spend and meet our debt obligations even in a verynegative gold price environment," said Gold Road managing director DuncanGibbs.

"Withtwo-thirds of our production un-hedged, we retain significant exposure to thecurrent higher gold price.

"Asour cash position improves even further, there will be less demand from ourinternal risk management to enter into new hedging facilities."