THE BOTTOM LINE
Hedge of the seat stuff as rand selloff sparks insurance talk
Gold miners may well take advantage of the weaker currency with bets to protect themselves for the future
The sudden weakening of the rand against a basket of currencies as the Turkish lira took punishment presents opportunities for SA mineral producers, with one in particular, Harmony Gold, showing a recent track record of well timed activity.
Gold miners can use a financial instrument called a hedge, which is essentially agreeing an upfront sale price of future production for delivery at set times. Both parties are taking a bet on what the metal price will do. It’s a bet that can go badly wrong for the mining company and its investors.Given the general wariness around hedging, SA gold producers have generally avoided hedging, but in recent years Gold Fields has hedged gold and oil prices for capital intensive projects in Ghana and Australia.
Harmony caught its investors by surprise in 2016, putting in place a hedge for 20% of its gold production for 24 months and putting in contracts for the rand exchange rate against the dollar, something that has enormously benefited its financials.
When the dollar price of gold increased and the rand weakened, pushing the local price of gold to above R600,000/kg, Harmony struck and has secured the inflows of one fifth of its annual production – realising prices well above the prevailing price at the time. It was a smart move that allowed it to repay debt and fund the extension of the Hidden Valley mine in Papua New Guinea.
While Harmony declined any comment about whether it had taken advantage of the fresh weakness in the rand because it is in a closed period, the company has already topped up its hedge positions once. The chance of it grabbing the first opportunity to do so again is highly likely.