JOHANNESBURG (miningweekly.com) – Gold producers’ hedging activity in the first quarter of 2014 edged over to the supply side of the market for the first quarter since 2012, with just 280 000 oz added to the global hedge book in the three months to end-March, a report by financial services firm Societe Generale  and Thompson Reuters GFMS revealed on Friday.

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, growing the hedge book by 11% quarter-on-quarter, with gold hedged against the delta-adjusted options book some 15% higher than at the end of 2013.

A 10% growth in the aggregate forward sales position was driven by a small group of companies, while several miners put new hedges in place over 2014 to offer greater income stability during a period of greater cash flow uncertainty.

“Concerning the rise in options position, the standout influence came from Pacific Rim producer OceanaGold, which added a collar structure covering 208 000 oz against production from its Macraes mine, in New Zealand.

“The effect of this new options hedge countered an overall drop in delta against the options book,” read the report.

In addition, as the gold price rose at the end of the first quarter, the delta hedge against producer-bought puts fell “aggressively”.

Meanwhile, many of the call options, which were written at much higher strike 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 Russian producer Polyus Gold on July 3 indicates that this will be dwarfed by fresh hedging in the second quarter, during which 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 New York-listed firms AngloGold Ashanti and Barrick Gold eliminated their hedge books,” commented Thompson Reuters GFMS precious metals mining manager William Tankard.

Looking ahead, the report noted that, while a large proportion of the gold mining industry continued to be loss-making at prices of $1 320, some of the largest producers had sought to restructure their portfolios through the divestment of higher-cost assets.

“As we have observed over the past 12 months, the incentive for widespread hedging has been, and continues to be, subdued, while 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 optimisation and proactive cost-cutting, often involving revisited mine plans,” it stated.

These mine plan changes had invariably raised cut-off grades and resulted in higher grade ore processing, which were 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,” said the report.

The 2014 delivery profile suggested that “just” 1.5-million ounces of hedged gold would come off the book, which would be more than outweighed by the recently announced hedging activity.

“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,” the report concluded.