"On another note, can you (or anyone else) tell me who ultimately benefits from the albatross around our necks that is the Macquarie hedge? Is it Macquarie that pockets the difference between the hedged and spot prices? Or was the hedge simply a condition of obtaining the debt facility, with the cream ultimately going to a third party? If it's the latter, who is the third party?"
Yes I can. Macquarie does not profit from the difference between the hedge price and spot price. Macquarie acts as broker only. As broker, Macquarie must guarantee the financial security of the futures market as it pertains to the trade, as the futures market is not allowed to lose money. To do this, Macquarie take the hedge from ALK and arrange the opposite side of the hedge on the futures market, with an unknown or known third party who wants to do the opposite. It is a zero sum game. For every loser their is a winner. If ALK win the third party loses and vice versa. Macquarie get a margin on the deal only. Macquarie are not in the business of speculating on the gold price. Macquarie are in effect guaranteeing ALK can deliver the gold. If ALK cannot, Macquarie still has to complete the opposite transaction with the 3rd party.
If the gold price goes down after the company borrows the money, the Company might go broke and may not be able to repay the loan to the bank. So, to eliminate the gold company going broke because the gold price went down, the bank will require a minimum amount of gold to be hedged based on a portion of the projected gold produced and the amount of funds the company want to borrow from the bank. This hedge eliminates the gold price falling as a reason for the company to go broke. The hedged price is based upon the spot price and futures price at the time of arranging the contracts. So if a company was to arrange a series of hedge contracts in 2022 when the spot price is AU$2,900, you would expect to receive a slightly higher price for a sale contract in the future, say $2,950 in 12 months time if the market is in Contango. If the price falls to AU$2,000, the company still gets AU$2,950 for the gold delivered under the hedge and theoretically can still pay the loan repayments to the bank.
So in answer to your questions,
- no Macquarie act as broker only for the hedge and for this receive a margin only
- a partial hedge is required to be set up as part of the loan to protect the bank, otherwise banks wouldn't lend money to gold miners like ALK
- who is the third party - noone usually ever knows as it doesnt matter. It could be a speculator who has no intention of buying the gold or someone who wants the gold. At the delivery day, the gold is generally bought or sold at the spot rate and open futures contracts losses or profits for that price are settled with cash and closed. ie - derivatives (outcome derived)
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