Just some comments on hedging.Once a hedge (be it flat forwards...

Just some comments on hedging.

Once a hedge (be it flat forwards or whatever) is in place, the banks/counterparties take on the delivery risk.

If the gold price goes higher, the banks/counterparties take on a greater dollar risk against future deliveries. That risk is initially US$ for the forward gold sales, but also has underlying risk back to the producers cost base, eg NZ $.

Whilst the producer keeps on churning away delivering gold as anticipated the banks maintain a degree of comfort. Particularly where the production costs remain on budget,ie low-cashflow positive.

This is traditionally further enhanced where the normal hedge book does not go beyond 65% of budgeted production. (This leaves 35% of production to enjoy a higher gold price and assist in either debt reduction or can be used as early delivery into the hedges!)

Where Sons of Gwalia went wrong was (i) increasing their debt position to pay dividends=naughty, and (ii) maximising their hedge book in excess of the 65% guideline over an extended period (up to 5 years) leaving them prone to any hiccups and making the banks extremely nervous.

There are other corporate failures in a rising gold market using hedges such as Centaur. The asset technically got better with a rising gold price but the banks got nervous as their exposure went up!

Oceana does not appear to fit these unfortunate equations given the low hedging ratio, demonstrable ability to deliver (when of the better ranked projects in Australasia) and low production costs into a reasonable minelife.

They would have had funding issues earlier in 2008 than others are now experiencing,(with the Didipio exposure), but this appears to have been bedded down in a sensible fashion.

Their convertible note holder, Ospraie, is on record as being slowly wound up and the opportunity to buy back these notes at a discount in future periods would not surprise. Similar to SBM?

Cheers,TAS