The Hedge Book sucks, no doubt. However, Regis were not the only Company to take this course, as the following AFR article from Jun20 stated:
https://www.copyright link/markets/equity-markets/how-some-gold-miners-missed-the-rally-20200729-p55gez
It will probably disallow access, so I'll reproduce a transcript below.
What seems like a mistake now, would've been seen as insurance at the time.
FWIW, I'd be happy to see this obligation to sell 295,000 at a price of A$1,571 postponed indefinitely. At least until a final decision has been made on McP. LTHs have suffered enough.
The 2021 Annual Report states that the Company has long term debt of A$293m and Creditors and Payables have blown out from A$75m to A$150m. I'm not in favour of any more debt. In the current environment, I'd prefer to see profitability maximised to pay down debt, even if it means postponing dividends.
The BOD have decided to reduce the Hedge Book over 3 years. While many examples of valuations would look at the future 3 years profitability of a business, the NPV of LOM profitability is more in focus with miners.
The Hedge Book sucks but it is what it is. All Goldies have some pockmarks if you peel away the concealer.
An interesting point about this article, is that at the time, the POG was not much higher and yet the RRL MC was over A$3b, even though the Hedge Book stood at 400oz and overall production (preTropicana) was ~370,000ozpa. The market must really feel Tropicana was a bad move. The Pretium sale disagrees.
How some gold miners missed the rally
Robert GuySenior WriterJul 30, 2020
Do you want to know where the gold price is heading? Then don't ask a gold miner.
As chief executives and directors of listed miners watched the gold price hover around $US1950 ($2720) an ounce on Wednesday, many would have been unable to resist doing the mental arithmetic on the revenue surrendered by hedge books lagging well behind the Australian dollar price of gold.
The price of regret is rising. What may have looked like a clever decision at the time – selling yet to be produced ounces at then seemingly high prices – is looking less wise by the day as the gap between those hedged prices and the spot price widened over recent months.
The drip-feed of quarterly production reports from Australia's listed gold miners has showcased how wrongfooted some have been by the rally in the precious metal that's been fuelled by economic uncertainty, a falling US dollar, negative real – or inflation-adjusted – interest rates, and rising geopolitical tensions between the US and China.
Regis Resources has a hedge position of 399,494 ounces at an average delivery price of $1614 an ounce. That's around $1000 less than the Australian dollar gold price.
The $3 billion miner said it delivered 19,014 ounces into its contracts in the June quarter, and that over the full year the impact on revenue of delivering into these hedges was approximately 6 per cent.
Regis, which has forecast production of between 355,000 ounces and 380,000 ounces in the 2021 financial year, says the rate of delivering into the lowest-priced gold hedges "will continue to be assessed for adjustment".
Market darlings like Evolution Mining and Northern Star have also not proved immune. But the high number of ounces they produce helps dilute the impact of their hedge books.
Evolution Mining's hedge book for its Australian operation is 300,000 ounces at an average price of $1872 an ounce for deliveries of 25,000 a quarter to June 2023. Hedging for its Red Lake mine in Canada is 120,000 ounces.
That said, the hedge book is pretty small relative to its production, which totalled nearly 750,000 ounces over the year to June.
Meanwhile, Northern Star Resources' hedge book stands at 536,426 ounces, or around 15 per cent of the next three years' production. But the $11 billion miner's hedge book out to December 2022 is priced above $2000 an ounce.
With some pundits calling for gold to rally to $US2000 an ounce, it's little wonder executive chairman Bill Beament said the miner would continue to reduce its hedge book this half, a move that provides scope for further growth in margins and free cash flow.
Why hedging makes sense
Just because the gold price has sprinted higher doesn't invalidate the use of hedging as a way for companies in a highly capital intensive industry to lock in revenue over the short and medium term.
A lot of smaller producers will enter hedging arrangements to secure financing for developments, while larger miners have used it to justify investments in operating mines.
Newcrest Mining, Australia's largest listed gold miner, has partially hedged the production of its Telfer mine because its profitability and cash flows are dependent on the realised Australian dollar gold price.
At its half-year results, Newcrest said there were 658,199 ounces hedged at an average price of $1875. There are 216,639 ounces hedged for the 2021 financial year at an average price of $1864.
Given the expectation – which may not prove true – that gold is set to rally further should an economic rebound gain traction and inflation start ticking higher, it's little wonder that some miners are crowing about their unhedged production.
West African Resources, whose 90 per cent-owned Sanbrado gold mine in Burkina Faso entered commercial production in the June quarter, is unhedged and should benefit as it ramps up production. Sanbrado produced 32,626 ounces of gold during the quarter.
Medusa Mining, which operates the Co-O mine in the Philippines, is also unhedged. It produced 95,000 ounces in the year to June at an all-in sustaining cost of $US1132 an ounce.
While unhedged production is the way to go when the gold market is hot, it's important to remember that picking the future price of an at times flighty commodity is a tough challenge.
So while futures traders on New York's COMEX exchange see the June 2021 gold contract trading at just shy of $US2000 an ounce, it was only a month ago that it was changing hands at around $US1810 an ounce.
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