July 2014

Global hedge book analysis

Q1 2014

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TABLE OF CONTENTS
Key Points

Introduction 4
Market Commentary

Company Activity

Composition & Sensitivity of the Global Hedge Book

Outlook 10
Technical Annex

11

Glossary 12
About the GFMS Team at Thomson Reuters

13

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Q1 2014

Key Points

Composition of the delta-adjusted

Global hedge book

The first quarter saw a modest delta-adjusted

addition of 278 koz (9 t), or 11% quarter-on-quarter.
Both the forwards and options portions of the
book increased.
This was the first increase in the hedge book
since a fractional gain in Q3-2012.
At end-March the hedge book volume stood at
2.80 Moz (87 t).
Several producers added hedge cover in Q1
though on balance hedges were over short tenors
and relatively modest in scale.
The largest hedge of the quarter was undertaken
by OceanaGold, by way of a collar structure against
its Macraes mine.
The extent to which the hedge book was an
asset contracted quarter-on-quarter, but retained a
positive marked-to-market value of $194 million at
end-Q1.
All of the activity recorded for Q1 is dwarved by
activity announced on 3rd July of new hedging by
Polyus Gold.

Introduction
Gold producers hedging activity in Q1 2014 edged
over to the supply side of the market for the first
quarter since 2012, with just 0.28 Moz (9 t) added to
the global hedge book in the three months to endMarch. Fresh hedging of both options and forwards
by a small group of emerging producers fractionally
outweighed the compensating factors of ongoing
deliveries and option delta effects.

Change
(Moz)
13.Q4 14.Q1 q-o-q
Forwards & Gold Loans
Options

2.07
0.45

2.28
0.52

10%
15%

Total

2.53

2.80

11%

Note: Totals may not add due to independent rounding.

Numbers are provisional and may be revised. Some
companys positions are not reported on a quarterly
basis and in these cases we have made estimates.
Source: GFMS, Thomson Reuters

growth in the aggregate forward sales position was

driven by a small group of companies, in the main
over relatively short tenors. Several miners put
new hedges in place over 2014 and hedged not as
a mandate attached to project finance but rather to
use hedging simply to offer greater income stability
during a period of greater cash flow uncertainty.
This included a move by one producer, Northern
Star Resources, to hedge part of its production
following the acquisition of several comparatively
leveraged assets. In the case of Detour Gold,
hedging was undertaken to offer a more clear
projection of revenue whilst production is ramped up
at its substantial Detour Lake mine (at which costs
should fall as steady-state production is achieved).

The hedge book in total grew by 11%, with gold

hedged against the delta-adjusted options book
some 15% higher than at end-2013. A 10%

Concerning the rise in options position, the standout influence came from OceanaGold, which added
a collar structure covering 208,000 ounces against
production from its Macraes mine. The effect of
this new options hedge countered an overall drop
in delta against the options book. As the gold price
rose to end-Q1, the delta hedge against producers
bought puts (which were on balance close-to-themoney) fell aggressively. Meanwhile many of the
call options, which were written at much higher strike

Net impact of producer hedging

Evolution of the Global Hedge Book

1800
Gold Price

Supply

1400

-3

3
2

600

-5

Demand

-7

06.Q1

08.Q1

Source: GFMS, Thomson Reuters

Moz

Moz

1000

US$/oz

-1

Options
Forwards & Gold Loans

10.Q1

12.Q1

200

14.Q1

1
0
12.Q1
Source: GFMS, Thomson Reuters

13.Q1

14.Q1

Q1 2014

prices, remained deeply out-of-the-money, and were

less impacted by the rally in the gold price.
Although this represents the first quarter of net
hedging for over a year, recent activity announced
by Polyus Gold on 3rd July indicates that this will
be dwarved by fresh hedging in Q2, during which
period most of the contracts appear to have been
structured. This certainly represents the most
significant hedging activity since the actions of 2008
and 2009 when AngloGold Ashanti and Barrick Gold
eliminated their hedge books. Analysis of the scale
of Polyus hedging activity and its market impact
will be published on Thomson Reuters Eikon in the
coming days.

Market Commentary
After gold registered its largest annual decline in 32
years, the sentiment in the market at end-December
was pointing towards further losses over 2014.
However, with hindsight, the first few sessions
proved to be indicative of the quarter ahead after an
array of technical levels were broken to the upside.

Prices (Quarterly Average)

13.Q4

14.Q1 Change

US$/oz

1,276.16

1,293.06

1%

US$/oz 12-mth rolling

-6%

1,411.23

1,327.42

Euro/kg

30,097

30,297

1%

Rand/kg

416,547

451,035

8%

4,120

4,273

4%

478,733

492,005

3%

83.04

91.99

11%

Renminbi/g

249.90

253.62

1%

Rupee/10g

25,450

25,674

1%

Rouble/oz

41,518

45,287

9%

1,376.49

1,442.31

5%

Yen/g
Rupiah/g
Turkish lira/g

A$/oz
Source: Thomson Reuters

index came under pressure on the back of the most

successful 30-year US bond auction since February
2013. As yields continued to plummet into midJanuary, premiums on the Shanghai Gold Exchange
(SGE) showed Chinese demand was steadily
building up to the Lunar New Year on 31st January.

Gold was off to a good start in 2014, opening at

$1,225/oz, nearly $21 above the year-end close.
Investors were reassured of the importance of the
key psychological support level at $1,200 as lower
prices spurred Chinese physical demand. During
2013, this key level was touted by many as the
marginal cost of gold production, which further
explained its importance. On 8th January gold fell
below the year-open and placed the low for the
remainder of the quarter at $1,221. In the following
days speculation grew around a delay in the
Federal Reserves tapering of its asset purchases
programme after US nonfarm payroll data fell short
of expectation. This saw gold rally as the dollar

The negative correlation between equities and

gold strengthened significantly in January after
the S&P500 posted its best yearly increase since
1997. On 25th January, gold broke above $1,260
and posted its largest one day rally in three months,
as equity markets corrected sharply on the back
of strong European manufacturing data. Russian
CDS spreads widened to four month highs as equity
markets continued to fall causing the Turkish lira
and Russian ruble to further depreciate. Further
support for gold came from South Africa as 70,000
AMCU platinum workers went on strike as the rand
continued to depreciate to its lowest level since
October 2008. Yet on 30th January gold dropped
nearly $22, following a pullback in the Federal
Reserves stimulus programme in light of robust US
economic data.

Gold ETF Holdings

Gold Price
1450

90

Value

61

80

Moz

85

59

75

57

70

Max: $1,385/oz (p.m. fix)

1375

US$bn

63

US$/oz

65

1300

1225
Min: $1,195/oz (p.m. fix)

55
01-Oct-13
01-Dec-13
01-Feb-14
Source: GFMS, Thomson Reuters

01-Apr-14

65
01-Jun-14

1150
01-Dec-13
Source: Thomson Reuters

01-Feb-14

01-Apr-14

01-Jun-14

Q1 2014

Markets were unsettled on 3rd March, when Ukraine

accused Russia of sending additional troops to
Crimea, causing Russian stocks and bonds to
plummet. As military tensions escalated, gold
and crude oil rose to a four and six month high
respectively. The safe haven appeal of gold was
strong, and prices were gaining momentum after
breaking above $1,350 on 12th March. The tone
in the market continued to draw investors towards
gold amid growing speculation around possible
trade sanctions against Russia. This, along with
renewed concerns of an economic slowdown in
China, caused precious metals to climb as safehaven bidding continued until 14th March, when gold
reached the year-to-date high of $1,385.

Speculative Net Positions in Comex Futures

Net Positions (contracts, thousands)

150

COMEX Price

120

1450

1375

90
1300
60
1225

30

COMEX Settlement Price (US$/oz)

In the first two weeks of February, gold rose over

nine straight sessions, after fears of a slowdown in
the manufacturing sector in the US were confirmed.
New orders dropped to a 33 year low, causing the
dollar index to tread water, while COMEX gold
futures for February delivery posted trading volumes
10% above the 250-day average. By 11th February,
gold hit a three month high following comments from
Federal Reserve Chair Janet Yellen which reiterated
that interest rates would remain near zero for the
time being. Her comments were followed by a
wave of technical buying and short covering activity
which took gold from $1,282 to $1,327. Attention
soon shifted to the FOMC minutes, which hinted at
a rate hike in 2015 as recent jobs reports were well
below past monthly gains. Though it was suggested
by some that the sluggish economic results may
have been due to exceptionally cold weather, gold
investor sentiment turned positive closing the month
at near the monthly high of $1,339.

0
1150
03-Sep-13 05-Nov-13 07-Jan-14 04-Mar-14 06-May-14
Source: CFTC
*Combined non-commercial & non-reportable positions

revamping its rate guidance. The sell off was

further intensified after Russian President Vladimir
Putin signed a treaty on the annexation of Crimea.
Thereafter geopolitical risk started to ease, which
played a major role in golds descent by $94 to
$1,291.75 by month end.

Over the second half of March gold traded in a

narrow downward trend channel as the US dollar
rallied, following Federal Reserve comments on

On the back of a weaker US dollar, treasury yields

began an early descent in April as gold rose from
$1,277 to $1,327. However, a strong ETF outflow
was able to offset earlier gains from renewed
Ukraine tensions causing crude oil and gold to trade
lower in tandem. Gold oscillated between $1,281
and $1,311 until 27th May when news hit the market
about a potential rate cut by the European Central
Bank. Views of a possible economic rebound in
US caused gold to fall over the next seven trading
sessions after US manufactured goods and home
prices inched higher. Over the month of June gold
rose from $1,240 to $1,320, posting its largest gain
since February on 19th June after short covering
ensued as the Federal Reserve showed lack of
commitment to raise interest rates. Thereafter, gold
prices recovered much of the ground lost in the first
two months of the quarter. Interestingly over the

Implied Gold Borrowing Rates

Contango & Forward Price

0.8

1450

12-Month*
3-Month*

Contango (RHS)
Forward Price (LHS)

0.20

0.6
0.15

0.2

0.10
1250
0.05

0.0

-0.2
01-Sep-13 01-Nov-13 01-Jan-14 01-Mar-14 01-May-14
Source: LBMA, Thomson Reuters
*LIBOR-GOFO

1150
01-Sep-13 01-Nov-13 01-Jan-14 01-Mar-14 01-May-14
Source: LBMA, Thomson Reuters

0.00

0.4

US$/oz

1350

Q1 2014

Company Activity
The first quarter of 2014 saw hedging return to
the supply side of the market, albeit on a modest
scale. Following five consecutive quarters of net
de-hedging, we saw the global producer hedge book
grow by nine tonnes in Q1, reaching a delta-adjusted
total of 87 tonnes at quarter-end, an 11% increase
on the end-2013 hedge book total.

Top (De-)Hedging Activity in 14.Q1

(delta-adjusted, spot basis)
Company

% of gross:
Change
Hedging (koz)

OceanaGold

26% 155.3

Northern Star Resources

14%

83.4

Detour Gold

12%

70.0

De-hedging (koz)

Petropavlovsk

22% 69.8

Sumitomo Metal Mining

10%

33.2

Saracen Mineral Holdings

10%

30.6

Note: Delta-adjusted volumes are calculated on the basis
of published company data. As such disclosures are not
exhaustive, the GFMS calculated position may not exactly
correspond to the delta-position reported by the company. In
addition, GFMS values the contracts on a spot delta basis,
whereas some companies report on a forward delta basis.
This can lead to minor discrepancies between the calculated
and delta-adjusted volumes. Where published data was
unavailable, an estimate based on the scheduled expiry of
contracts has been made. Source: GFMS, Thomson Reuters

For the first time since Q3 2012, new hedging

activity outweighed deliveries into existing contracts
over the period. While 18 companies reduced
their delta-adjusted hedge books by a collective
10 tonnes, a further 17 companies expanded their
positions by a total of 19 tonnes during the period.

Some smaller hedge contracts were also entered

into during the first quarter by miners who have
recently commenced production. Doray Minerals,
which poured first gold from its Andy Well operation
in August 2013, undertook an additional 39,651 oz
(1 t) of hedging, for delivery between October 2014
and September 2015, at a gold price of A$1,505/
oz. In addition, Alkane Resources achieved first
gold poured at Tomingley in February, and entered
into forward sales of 25 koz (1 t) at A$1,449/oz,
for delivery in May 2014. A number of the other
expansions in producer hedge books during the
quarter were due to increases in delta-adjusted
options positions.
The more significant decreases in hedge book
volumes during Q1 came from producers such as
Petropavlovsk and Saracen Mineral Holdings, both
of whom are estimated to have continued delivering
into existing contracts.
During the second quarter of 2014 Millennium
Minerals added to its existing hedge position as part
of a revision to its project finance arrangements.
Global Hedge Book Marked-to-Market
-400

2
Marked-to-Market

-600

-2

-800

-4

-1000

-6

-1200
-1400

-8
Gold Price
(end-period)

-10
-12

08.Q1

09.Q1

10.Q1

Source: GFMS, Thomson Reuters

11.Q1

-1600

12.Q1

13.Q1

-1800
14.Q1

US$/oz (inverted)

The largest new hedge position of the quarter was

entered into by OceanaGold, who entered into a
zero-cost collar hedge covering 208 koz (6 t) of
production from its Macraes mine over the next
two years, with put options at NZ$1,500/oz and call
options at NZ$1,600/oz. Northern Star Resources,
which has already acquired a number of assets
during 2014, including the former Barrick Gold
mines, Kanowna and Plutonic, sold forward 100
koz (3 t) (some of which had already been delivered

by end-Q1) at A$1,462/oz, over 12 months, an

estimated 28% of production for the period. Detour
Gold was another of the more significant new
hedgers for the period, having entered into a series
of both USD and CAD denominated forward sales
during January 2014. The 70 koz (2 t) outstanding
at the end of Q1 represents approximately 20% of
forecast sales for the remainder of this year. During
March, Silver Lake Resources entered a forward
sales agreement for 50 koz (2 t) at an average
price of A$1,536/oz, for delivery over the year from
April 2014. This represents approximately 30%
of forecast production over the period, and was
undertaken in order to secure a favourable margin
on the processing of low-grade stockpiles.

US$ billion

month of June, the monthly correlation between the

S&P500 and gold went from -0.8 to +0.8, causing
gold to lose its appeal as hedge amongst investors.

Q1 2014

A further 60 koz (2 t) of forward sales have been

added, resulting in a total forward sales position
that covers an estimated 70% of production to June
2016, at an average price of A$1,513/oz. However,
Beadell Resources took the opportunity to close out
its remaining hedge position during Q2, booking a
profit of approximately $16 million by doing so.
The recent announcement from Polyus Gold
represents the largest individual new hedge of recent
years, and will have a significant effect on the global
hedge book. The program is intended to provide
price protection for the construction-stage Natalka
project, and encompasses both forward sales and
zero-cost Asian collars, over a four year period.
The end-Q1 gold price of $1,283/oz (COMEX
settlement), an increase of $82/oz on the end-Q4
price, resulted in an increase in producers
unrealised marked-to-market liabilities. Although the
global marked-to-market value of the hedge book
remained an asset at the end of Q1, it fell by $165
million to a net asset of $194 million.
Nominal Hedge Book Composition
13.Q4 Nominal Volume:
3.80 Moz (118t)

14.Q1 Nominal Volume:

4.34 Moz (135t)

Composition &
Sensitivity of the
global Hedge Book
The first quarter of 2014 saw a return to net hedging,
with the delta-adjusted global producer hedge book
growing by a modest 278 koz (9 t). This was largely
due to a 211 koz (7 t) net increase in the forwards
portion of the hedge book, as deliveries into existing
contracts were outweighed by new hedges by
producers including Northern Star Resources,
Detour Gold and Silver Lake Resources, which
collectively entered into approximately 220 koz (7 t)
of forward sales agreements during the period. The
delta-adjusted options portion of the hedge book
increased by 67 koz (2 t), as maturity of existing
contracts held by producers such as Minera Frisco
and Orvana Minerals was outweighed by increases
in delta-adjusted positions of other producers,
notably OceanaGold, who added a zero-cost collar
covering a nominal 208 koz (6 t)
during Q1.
Forwards
& Loans
Net Calls
Net Puts

Source: GFMS, Thomson Reuters

Sensitivity of the Options Book 14.Q1

Move in
M
ove in Gold Price
Volatility
(US$/oz)
(%)

-400 -300 -200 -100
0 +100 +200 +300 +400
8

0.85 0.78 0.71 0.65 0.60 0.58 0.60 0.63 0.68

0.86 0.79 0.71 0.64 0.58 0.56 0.57 0.61 0.67

0.87 0.80 0.71 0.63 0.56 0.54 0.55 0.59 0.65

0.87 0.80 0.72 0.62 0.54 0.51 0.53 0.57 0.64

0.88 0.81 0.72 0.61 0.52 0.48 0.50 0.56 0.63

-2

0.89 0.82 0.73 0.60 0.50 0.45 0.48 0.54 0.62

-4

0.90 0.83 0.73 0.60 0.47 0.42 0.45 0.52 0.60

-6

0.92 0.85 0.74 0.59 0.45 0.39 0.43 0.51 0.59

-8

0.93 0.86 0.75 0.59 0.42 0.36 0.42 0.50 0.58

Source: GFMS, Thomson Reuters

Note: The matrix above shows the sensitivity of the delta-adjusted hedge book at end-Q1,
under different gold prices and volatilities, assuming all other factors remain equal. The deltaadjusted total options book at the end of 14-Q1 was calculated at 0.52 Moz, based on the end
quarter gold price of $1,283/oz, and proprietary Socit Gnrale market rates.

In nominal terms, the global hedge

book volume grew by 14%, to 4.34
Moz (135 t). The nominal options
position increased more than the
forward sales position, with quarteron-quarter gains of 332 koz (10
t) and 211 Moz (7 t) respectively.
Consequently, the nominal
composition of the producer hedge
book stood at 53% forwards and 47%
options at the end of Q1, compared to
55% forwards and 45% options at the
end of 2013. However, it should be
noted that a significant proportion of
the outstanding options contracts are
collar structures, and the number of
ounces of gold production covered by
these hedges is somewhat lower than
the nominal figure suggests.
The amount of gold delta-hedged
against the options book saw an
overall increase during the first quarter
of this year. The rising gold price
meant that bought put options moved
further out-of-the-money, with a
corresponding decrease in gold deltahedged against them. However, the

Q1 2014

End-14.Q1 Delta-Adjusted Options Book

1.0

Contract Weighted Average Strike Prices

Put Options

(weighted by number of contracts)

Call Options

Bought Puts

$1,178/oz

$1,348/oz

Sold Calls

$1,722/oz

$1,628/oz

Forward Sales

$1,341/oz

$1,536/oz

0.8

Moz

0.6

USD AUD

Source: GFMS, Thomson Reuters

0.4

the amount of hedging against the options book by

only 21%.

0.2

0.0
883

1,083

Source: GFMS, Thomson Reuters

1,283
US$/oz

1,483

1,683

addition of new contracts during the quarter resulted

in an overall small increase in the amount of gold
delta-hedged against the total put option component
of the hedge book. Meanwhile, quarter-on-quarter,
the sold call contracts moved less deeply out-of-themoney, on a combination of the higher gold price
and new contracts lowering the weighted average
strike price.
The sensitivity matrix on the previous page provides
a snapshot of how the volume of gold delta-hedged
against the options portion of the global hedge
book would have changed as a function of volatility
and gold price, assuming all other market factors
remained constant at end-March. The matrix
indicates that, over this range of scenarios, the
bought put portion of the producer hedge book
is more sensitive to price moves than the sold
call contracts. As outlined in the chart above, at
constant volatility, a $400/oz fall in the gold price
would have led to the volume of gold hedged against
the options book increasing by almost 70%, whereas
a $400/oz gold price increase would have increased

The weighted average strike price of bought put

contracts denominated in US dollars increased
quarter-on-quarter, whereas the average strike price
of USD sold calls fell over the period. Comparison
of the charts below indicates that this was due
to the addition of bought put contracts in the
US$1,301-1,400/oz range, raising the average price.
Meanwhile, some of the higher-priced sold call
contracts have expired during Q1, while additional
contracts at lower strike prices have been added.
For forward sales contracts, the weighted average
strike price fell slightly quarter-on-quarter, for both
USD and AUD-denominated contracts.
The spread between the bought put and sold
call weighted average strike prices narrowed by
US$105/oz quarter-on-quarter; however, with an
average gold price for Q1 of US$1,294.96/oz (PM
fix), the options portion of the hedge book continues
to function more as downside protection than as a
cap to price upside. The extra margin gained from
forward sales contracts has, on average, decreased
by over US$30 since Q4 2013 and this effect was
even more pronounced for AUD-denominated
contracts, due to the fall in the Q1 average gold
price in AUD terms to A$1,444.01/oz.

Distribution of Option Contracts by price, koz

US dollar denominated contracts, Q1 14
600

300

US dollar denominated contracts, Q4 13

0

300

600

2,201-2,300
2,201-2,300
2,101-2,200
2,101-2,200
2,001-2,100
2,001-2,100
1,901-2,000

1,801-1,900
1,801-1,900
1,701-1,800
1,501-1,600

1,401-1,500
1,401-1,500
1,301-1,400

1,201-1,300
1,201-1,300
1,101-1,200
1,001-1,100
901-1,000
801-900
801-900
701-800
701-800

Sold Call Options

Bought Put Options

300

Source: GFMS, Thomson Reuters

300

300

600

US$/oz

US$/oz

1,601-1,700
1,601-1,700

600

600

2,201-2,300
2,201-2,300
2,101-2,200
2,101-2,200
2,001-2,100
2,001-2,100
1,901-2,000
1,901-2,000
1,801-1,900
1,801-1,900
1,701-1,800
1,701-1,800
1,601-1,700
1,601-1,700
1,501-1,600
1,501-1,600
1,401-1,500
1,401-1,500
1,301-1,400
1,301-1,400
1,201-1,300
1,201-1,300
1,101-1,200
1,101-1,200
1,001-1,100
1,001-1,100
901-1,000
901-1,000
801-900
801-900
701-800
701-800

0
koz

300

600

-600
600

Sold Call Options

Bought Put Options

-300
300

Source: GFMS, Thomson Reuters

0
koz

300

600

Q1 2014

Outlook

assets, the company hedged 100 koz (3 t) of nearterm production, at a strike price of A$1,462/oz.

Compared to the final quarter of 2013, the number

of companies entering into hedging early this year
increased notably (although modest in scale), with
17 producers recording net-hedging on a deltaadjusted basis. The largest activity in the first
quarter was seen by OceanaGold, with a zero-cost
collar structure covering 208 koz (6 t), followed by
Northern Star Resources which sold 100 koz (3 t), or
28% of the companys projected full year production
forward. Similarly, four other producers (Detour
Gold, Doray Minerals, B2 Gold Corp and Silver Lake
Resources) collectively hedged over 7 t. While the
theme across the gold mining sector continues to be
that maintaining un-hedged status, focus across the
industry is centering principally on a number of cost
containment initiatives.
Whilst a large proportion of the gold mining
industry continues to be loss-making at prices
of $1,320, some of the largest producers have
sought to restructure their portfolios through the
divestment of higher cost assets. Of the major
restructured portfolios, Barrick Gold has continued
the rationalization initiated in 2013 to sell off noncore assets including Kanowna and Plutonic while
Newmont sold Jundee. Although considered
non-core for these major producers, in making
these acquisitions, their counterparty, junior miner
Northern Star Resources, is consequently due to
increase annual production from 100 koz to 550 koz
at an acquisition cost of less than A$200 million. To
fund this growth, Northern Star raised $100 million
through an equity placement and a further $28.9
million through a share purchase plan. Perhaps in
recognition of the relatively leveraged nature of the
14.Q1 Delivery Profile
1.8
1.5

Forwards & Gold Loans

Moz

0.9
0.6
0.3

2014
2015
Source: GFMS, Thomson Reuters

10

The 2014 delivery profile suggests just 1.5 Moz (48

t) of hedged gold will come off the book. This will
be more than outweighed by recently announced
hedging activity (below). In addition, project finance
hedging remains an obvious route for some smaller
companies, or companies without ample balance
sheet flexibility, seeking to develop quality assets.
Roxgold Inc recently announced that it had reached
a mandate for a $75 million senior debt facility
involving hedging some 8.5% of Yaramokos current
reserves. Similarly, Millennium Minerals secured a
senior debt facility requiring the company to hedge
a further 60 koz. Most notably, at the time of writing,
Polyus Gold has entered into a series of zero cost
collars and gold forwards covering 2.83 Moz (88 t)
of production over a four year period. This hedge
will enable the remaining development of Natalka
without placing further pressure on the companys
balance sheet.

Options

1.2

0.0

As we have observed over the past 12 months, the

incentive for widespread hedging has been, and
continues to be, subdued while prevailing contango
remains very modest and a large proportion of the
industry is loss making on an All-in Cost basis.
Rather than hedge output and establish a rigid
sales price floor, the industry appears focused on
portfolio optimization and proactive cost-cutting,
often involving revisited mine plans following last
years re-calculation of reserves following the severe
fall in metal prices. These mine plan changes
have invariably raised cut-off grades and resulted
in higher grade ore processing, such as seen at
Penasquito, and are beginning to have the effect of
lowering unit costs. Responsible capital deployment
remains a major focus as a number of projects no
longer pass the required return on investment hurdle
rates and have been curtailed or deferred.

2016

2017

2018

Although Polyus hedge is substantial, it is worth

stressing that this strategy was undertaken to
improve the prospects of robust return on investment
at the front-end of this world-class mines life. We
would not suggest that this activity, which is projectrelated is necessarily a sign of things to come across
the broader industry whilst gold prices and contango
provide unattractive hedging conditions.

Q1 2014

Technical Annex
The GFMS team at Thomson Reuters analysis
calculates the delta-adjusted global hedge book from
a suite of market data and proprietary tools from
Thomson Reuters Eikon. Each mining companys
individual trades are captured on a quarterly basis.
Each option trade is entered by mid-year of expiry
and are modelled as European options. Moreover,
non-vanilla products such as convertible forwards
have been broken down into their constituent
options. This analysis enables us to accurately
obtain key parameters and valuations for each
instrument used by each company and subsequently
for the global hedge book as a whole. This
methodology also allows us to model the delivery
profile of the hedge book.
All forward contracts, including spot deferred,
floating rate forwards and fixed rate forwards,
are input as forward sales. Options contracts,
including cap and floor agreements, are entered
as their constituent vanilla put and call contracts.
Convertible and contingent options are unbundled
into their constituent barrier options contracts.
Trigger levels for barrier options are taken as the
mid-point of published ranges, where available.
Convertible forward contracts are modelled as a
barrier call option combined with a vanilla put option.
In terms of the GFMS analysis, the key parameter of
interest is the delta-adjusted position. As explained
in the glossary, the delta of an option (or indeed of
a forward) is the rate of change in the value of the
derivative for a change in the price of the underlying.
In the case of a gold forward sale (or purchase), the
forward delta is 1, whilst in the case of an option,
this delta is derived from the Black-Scholes option
pricing formula.
The counterparties to mining companies hedging
activity (typically banks) will dynamically hedge their
exposure through delta hedging. For example,
suppose a mining company purchases a put option.
The writer of the option (a bank) will be long the
delta volume. In other words, if the delta of the
option is +0.5 and the nominal volume of the trade
is 100,000 ounces, the delta volume will be 50,000
ounces (of which the bank will be long). To hedge
this exposure, the bank must therefore undertake
a transaction that yields an equal and opposite
position (i.e. short). This will typically be achieved

11

by the bank borrowing gold (normally from a central

bank) and selling this into the spot market. Through
this mechanism, mining companies hedging
activities impact directly on the spot gold market.
It should be borne in mind that the value of an
option, as well as the delta, will change in response
to movements in key parameters, particularly the
spot gold price, but also market volatility, interest
rates and time to expiry. In response to this, banks
will continuously or dynamically adjust their delta
hedge position.

Q1 2014

Glossary
Option - An option contract gives the holder the
right, but not the obligation, to buy or sell gold at a
predetermined price on or by an agreed date.
European Option - An option that can only be
exercised at the expiry date.
American Option - An option that can be exercised at
any time prior to the expiry date.
Put Option - An option contract which gives the
buyer the right, but not the obligation, to sell a
specified amount of gold (or other asset) at a
predetermined price (the strike price) on or before a
specified date (expiry date).
Call Option - An option contract which gives the
buyer the right but not the obligation to buy a
specified amount of gold (or other asset) at a
predetermined price on or before the expiry date.
Barrier Option - An option whose outcome depends
on the performance of the price of the underlying
during the life of the option and whether that price
breeches a predetermined barrier.
Forward - A transaction in which two parties agree to
the purchase and sale of gold at a future date.
Gold Lease Rate - The cost of borrowing or return
from lending gold, the daily level of which reflects the
supply and demand for metal in the lending market.
Writer - The writer or grantor is the party who sells
the option and receives that premium income.

Gamma - The rate of change of delta with respect to

the asset price.
Theta - The rate of change of the price of a
derivative with the passage of time.
Vega - The rate of change of the price of a derivative
with volatility.
Rho - The rate of change of the price of a derivative
with the interest rate.
Greeks - The basket term for the above hedge
parameters (delta, theta, vega, gamma, rho).
Underlying - Shortened term for the underlying
commodity on which forwards and options are
traded (i.e. in this case gold).
Delta Hedging - A hedging scheme that is designed
to make the value of a derivatives portfolio
insensitive to small changes in the price of the
underlying.
Black-Scholes Model - A model for pricing European
options. Developed by Fischer Black, Myron
Scholes and Robert Merton. See F. Black and M.
Scholes The Pricing of Options and Corporate
Liabilities Journal of Political Economy 81, 1973
and R.C. Merton Theory of Rational Pricing Bell
Journal of Economics and Management Science 4,
1973.

Long - A position in an asset (e.g. gold) for which the

value will rise should the price of that asset rise.

Vanilla/Non-Vanilla - Vanilla options are simple put

and call options, whilst non-vanilla options are more
complex, with pay-offs dependant on a variety of
market factors, such as price paths or the price of
alternative assets.

Short - A position in an asset (e.g. gold) for which the

value will fall should the price of that asset rise.

Volatility - A measure of the uncertainty or rate of

change of an asset price.

Delta - The rate of change of the price of a derivative

with the price of the underlying asset.

12

Q1 2014

About the GFMS team

www.thomsonreuters.com
http://commoditiesupdates.thomsonreuters.com
The GFMS team at Thomson Reuters is recognised as one of the worlds leading economics consultants in
precious metals, specialising in research into the global gold, silver, platinum and palladium markets. It is
also a leading provider of top quality research on base metals and steel. GFMS analysts present regularly at
international conferences and seminars on precious metals and commodities and are frequently quoted in
the media for their views on the gold, silver and PGMs markets.
GFMS is credited with producing the most authoritative surveys of the gold and silver markets, the annual
GFMS Gold Survey and World Silver Survey, and GFMS gold and silver supply/demand data forms the
global benchmark; the international gold and silver markets are largely dependent on GFMS statistics. The
GFMS team at Thomson Reuters also produce a range of other publications dealing with all aspects of the
precious metals markets, and provide consultancy services in the form of tailor-made research into selected
areas of the precious metals markets.

13

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Q1 2014

PRODUCER HEDGE BOOKS 14.Q1

(koz)
Company Totals
Forwards
OceanaGold

Net Nominal
Delta-adjusted
Options Total Options Total

554 554

225 225

Regis Resources

191

50 241

33 224

Petropavlovsk

209

0 209

0 209

B2 Gold Corp

192

Evolution Mining

185

0 185

0 185

Boliden

160

0 160

0 160

Saracen Mineral Holdings

149

Beadell Resources

145

Yukon Nevada Gold Corp

139

Perseus Mining

129

0 129

0 129

91

15 106

15 106

Endeavour Mining

32

224

149

48 194
0

139

Northern Star Resources

83

PanTerra Gold

81

0 81

Detour Gold

70

Minera Frisco

83

0 70

196

149

0 146
0

139

83

0 81
0 70

196

196

67

67

Dundee Precious Metals

58

58

58

Doray Minerals

57

0 57

0 57

Millennium Minerals

51

0 51

0 51

Silver Lake Resources

50

50

50

Orvana Minerals

16

96

112

33

50

Lonmin

43

Independence Group

Endomines

39

Hochschild Mining

33

St Barbara Mines
Petaquilla Minerals
Sumitomo Metal Mining

0
26
0

Alkane Resources

25

Shanta Gold

24

Penoles
Coeur Mining

0 43
221

221

0 39
0 33
107

107

0 26
461

461

0 25
0 24
192 192

0 43
41

41

0 39
0 33
33

33

0 26
25

25

0 25
0 24
22 22

75 75

19 19

Luna Gold

17

0 17

0 17

First Quantum Minerals

14

14

14

American Bonanza

0 3

0 3

Comstock Mining

9 9

2 2

Anaconda Mining

0 2

0 2

Atna Resources

0 1

0 1

Source: GFMS, Thomson Reuters, Company Reports

*Where companies have not reported hedge positions, we have made reasonable
estimates based on available data. Totals may not add due to rounding. Negative
numbers indicate a long contract position.

DISCLAIMER
Whilst every effort has been made to ensure the accuracy of the information in this document, the content of this document is provided without any guarantees, conditions or warranties
as to its accuracy, completeness or reliability. It is not to be construed as a solicitation or an offer to buy or sell precious metal, related products, commodities, securities or related financial
instruments. To the extent permitted by law, we, other members of our group of companies and third parties connected to us hereby expressly exclude:
All conditions, warranties and other terms which might otherwise be implied by statute, common law or the law of equity. Any liability for any direct, indirect or consequential loss or
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15