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Gold Mining Hedges Rise with Costs & Price

Gold Mining Hedges Rise with Costs & Price
Composition with 50 gram gold bar, banknotes and coins.
Gold mining profit margins still rise with bullion, invite a second quarter of hedging…
GOLD MINER hedging to lock in market prices rose for a second consecutive quarter between April and June, according to leading analysts, as mining costs also rose together with world bullion prices.
Led by smaller miners in Australia – where quarterly output hit a 15-year record in Q2 as gold priced in Aussie Dollar terms touched all-time highs – the total amount of unmined gold sold in advance to lock in prices rose 8% says Thomson Reuters GFMS, publishing its latest Global Hedge Book analysis for French investment and bullion bank Societe Generale on Friday.
Gold miner hedging saw its sharpest percentage jump since the 1990s in Q1 as world prices rose, albeit from a relatively low start.
Priced in US Dollars, Q2 then saw the first back-to-back rise in quarterly average bullion prices since gold hit its current all-time peak in Q3 2011.
Chart of quarterly average gold price in US Dollars per ounce
Accounting for head office and exploration expenses as well as direct charges meantime, specialist consultancy Metals Focus said this week that the average “all-in sustaining cost” of mining 1 ounce of gold rose 6% worldwide in the second quarter of 2016 from the previous 3 months – the first increase since spring 2014.
The cost increase just lagged the rise in market prices however, raising AISC profit margins by 7% to an average $379 per ounce.
“Currency movements proved the main driver,” says Metals Focus‘ analysis, extending the pattern of recent years but this time pushing US Dollar mining costs higher as major gold-producer currencies such as the Australian Dollar, Canadian Dollar, Russian Ruble and South African Rand rose on the FX market.
Taking advantage of Q2’s improved profit margings, new hedging of unmined gold added 21 tonnes to the outstanding total already protected against price falls, says GFMS, taking the global hedge book to a 6-year high of 295 tonnes by end-June.
Swelling by two-thirds from total  gold miner hedging in mid-2015 however, that totals less than 10% of the record hedge book built by the global gold-mining industry as prices fell during the long bear market ending in 2001.
“The gold producer community,” says GFMS, “is starting to develop a more open attitude towards hedging” after the shareholder backlash and rapid de-hedging amid gold’s 2001-2011 bull market.
But looking ahead to Q3, pre-booked deliveries to settle existing hedge contracts make “modest de-hedging the more likely outcome” unless gold prices rise to new 3-year highs above $1400 per ounce.
For mining costs, “We are of the view that Q1 2016 marked the bottom of the deflation cycle,” says Metals Focus.
“Global gold production costs will continue to rise over the coming quarters as gold prices improve and margins recover.”
The outstanding global gold miner hedge book has not expanded for 3 consecutive quarters since the turn of the millennium on GFMS’ data.
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