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ANALYSIS |
 Russia’s leading gold producer Polyus Gold International has signed contracts on the sale of 2.83 million ounces of gold by the middle of 2018 under several schemes, which will protect the company from gold price fluctuations. The planned sales are equal to approximately 40% of the company’s possible output.
The company has an ambitious investment program. In 2014, the company plans about U.S. $700 million spending, including $320 million on the Natalka project, which is one of the world’s largest untapped gold deposits containing 40.8 million ounces of gold with an average gold grade of 1.13 grams per tonne.
While gold is traded above $1,300 per ounce, and there are still banks believing in positive future of gold, Polyus Gold made not a traditional decision for the company to enter several hedge deals.
SCHEMES OF SALES
The first scheme (zero cost Asian collars) envisages sale of envisages sale of 300,000 ounces annually from April to March 2017, and 900,000 ounces in the forth year from April 2017 to March 2018. Gold will be sold at a price of $1,382 per ounce, if the market price does not fall below $950 per ounce or reaches $1,634 per ounce. If the market price exceeds $1,634 per ounces, the company will sell the metal at $1,518 per ounce.
If the average price, which will be set quarterly, amounts to between $1,382 and $1,634, the company will sell gold at market price.
In the fourth year, the lower band will be set at $907 per ounce, the upper - at $1,777 per ounce. Gold will be sold at a price of $1,037 per ounce, if the market price does not fall below $907 per ounce. If the market price exceeds $1,777 per ounces, the company will sell the metal at $1,559 per ounce. In case when gold price on the market stands between $1,037 and $1,777 per ounce, the company will sell gold at a market price.
The other Asian scheme will be valid from July to June 2018 and envisages sale of 120,000 ounces annually within the first three years and 360,000 ounces in the fourth year. In the first three years, gold price will be calculated quarterly. The price will amount to $1,359 per ounce, if market price stands between $950 to $1,359 per ounce, and to $1,425 per ounce, if market price exceeds $1,525 per ounce. The company will sell gold at a market price if it amounts to between $1,359 and $1,525 per ounce.
In the fourth year, the company plans to sell 360,000 ounces at $1,100 per ounce if the market price amounts to $900–$1,100 per ounce, and $1500 per ounce if the market price exceeds $1,650 per ounce. The company will sell gold at market price, if it amounts to between $1,100 and $1,650 per ounce.
The third scheme presents forward contracts for the sale of 155,000 ounces of gold annually within two years at a price of $1,321 per ounce.
RESULT
“Polyus had successfully chosen time for hedging. If they had made it last summer, the company would lose, because the lower band of their price range would have amounted to $1,300 per ounce, and not $950 per ounce. Now, the gold market is more definite than last year, that it why it became easier for companies and banks to talk about hedging”, said Oleg Petropavlovsky from BCS.
The program is aimed at increasing the certainty of a material proportion of the company’s cash flow as it continues its capital investment in the Natalka project.
“The program is intended to the protect operating margins of Polyus Gold and ensure the stability of its balance sheet given the unique circumstances of the gold price volatility and substantial capital commitments to Natalka in the short term”, the company said in a statement.
By the end of 2014, the company plans to mine 6,154 cubic meters of ore material at the Natalka, including 2,300 cubic meters of water. The launch of an ore and dressing plant at the deposit is scheduled for summer 2015.
GLOBAL HEDGE BOOK
As a result of Polyus Gold’s agreements, the global hedge book will at least double by the end of this year. At the end of the first quarter, it amounted to 2.8 million ounces. The 2014 delivery profile suggests just 1.5 million ounces of hedged gold will come off the book. This will be more than outweighed by recently announced hedging activity by Polyus Gold, which had entered into a series of zero cost collars and gold forwards.
According to Thomson Reuters GFMS, 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.
Barrick had a total of 9.5 million ounces of gold under hedge deals, which were completely closed in two years in December 2009, while AngloGold Ashanti’s hedge obligation stood at 11.3 million ounces in 2008, and were closed in October 2010.
RUSSIAN PEERS’ EXPERIENCE
Polyus Gold had never used hedge contracts before. Among Russian gold mining companies, only Petropavlovsk Plc currently uses hedges. The company had successfully entered into a series of hedge deals before the gold drop in April 2013. Thanks to hedge agreements, Petropavlovsk was selling gold at $1,519 per ounce last year, while gold market price was in the range of $1,300–$1,400 per ounce and at $1,200 per ounce in December 2013.
Polymetal was the only Russian gold miner, which had used hedge contracts, but it was before the company’s listing on the London Stock Exchange. In December 2004, two subsidiaries of Polymetal - Serebro Territorii and Serebro Magadana had signed a hedge deal on the sale of silver to Standard Bank London from January 1, 2005 to January 31, 2009. By the end of 2007, the company had to sell silver at a fixed price.
In 2005, Polymetal supplied 8.1 million ounces of silver at a price of $6.66-$7.95 per ounce, in 2006 - 9 million ounces at the same prices. By December 31, 2007, the company had to supply at least 13.9 million ounces at the same prices. In April 2007, Polymetal announced intention to complete the agreement ahead of schedule.
In 2006–2007, silver price was above the Polymetal’s hedge agreements, thus the company lost $40 million in revenue in 2006 and $70 million in 2007. Additionally, the government obliged the company to pay taxes, using the market prices.
Currently, the company do not plans to enter hedge contracts, the company’s representative told PRIME. “The hedge agreements lacks the possibility of using the potential of rising prices, carries tax risks, as well as costs money - banks take commission for its arrangement”, the company said.
Nordgold management have announced several times that the company did not consider hedge agreements. “We see no necessity in hedging gold prices, because Nordgold currently has no large-scale investment obligations, while the company’s subsidiaries continue to generate free cash flow”, according to a representative of Nordgold.
POLYUS GOLD KEEPS RATING
Slightly after the announcement of Polyus Gold’s gold hedge deals, Fitch Ratings has affirmed the company’s long-term issuer default rating (IDR) to ‘BBB-‘, with the stable outlook.
The affirmation of the rating reflects the company’s resilient financial performance despite a weak market environment as well as its prudent management approach to ensure stable production growth while protecting its credit profile.
Fitch takes a positive view of management’s decision to postpone development to allow for additional technical optimizations in the project and to avoid significant deterioration in leverage.
The company has considerably strengthened its operational diversification over the past few years through the launch of the Blagodatnoye, Titimukhta and Verninskoye mines, thereby reducing the share of the Olimpiada mine, the company’s flagship mine, to 42% of total output in 2013 from 64% in 2009. With the commissioning of the Natalka project, the largest gold deposit in Russia and the third largest globally by reserves, Polyus Gold’s operational diversification will be even stronger.
The commissioning of Natalka was initially scheduled in summer 2014 but in December 2013 Polyus Gold announced the decision to postpone the development of the project to summer 2015 due to material gold price decline, an over-ambitious original construction schedule and opportunity to consider additional operational improvements.
In 2014, Polyus Gold plans to keep production virtually unchanged at 1.58–1.65 million ounces.
End
08.07.2014 11:24
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