Gold hedging has come to be quite a negative for gold stocks as...

Gold hedging has come to be quite a negative for gold stocks as the gold price rises. Resolution of the hedges has happened with Newcrest, Lihir and now Barrick amongst others.

In the Barrick case the hedges were 9.5 million ounces about 140% of annual production. At the end of this year OGC will be hedged to about 65% of annual production in 2010 and then be unhedged. Thus OGC is about 50% hedged compared to Barrick.

The problem with raising capital to buy back hedges is that you resolve a one-time issue but the number of shares is permanently increased impacting on the earnings per share which is a key factor in determining the share price.

If you can produce the gold at a cash cost around or less than the hedge price and the hedges can be eliminated quickly there is an argument to press on with production for delivery to the hedges.

The 2010 hedges have an average price of around $NZ900 and at a $NZ/$US of about 0.70 this equates to a hedge price of about $US600 which is above the cash production cost estimated at $US450. With the 100,000 ounces unhedged + current cash + recent capital raising + rebricking behind them OGC should get through 2010.

OGC is then a 300,000 ounce unhedged producer. The other factor is the expansion of the reserve base with the new drilling program but my investigation indicates there is a strong possibility that this will be positive.

If things come together OGC is a good proposition but the market is weighing up the risk/reward equation.