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why yo be wary of hedgers eg sgw

  1. junior

    1,005 Posts.

    Some tit bits for ppl to muse over-

    After wading through two pages of complex hedge data for Sons of Gwalia ( ASX SGW ) quarterly report released today these notes seem to give us the picture. They say there are no margin calls required for their hedge book, but for a company that produced 140,172 Oz of gold in the quarter ( at a small profit ) these figures calculated on the Dec 31st 2002 POG don't look too promising IMHO.

    From the quarterly report.....

    The current mark to market value of the Company's gold hedge and options book is negative $693 million. This calculation was based on a spot gold price of A$605 ( US$342.75 gold price and 0.5666 exchange rate ) .

    ( 3 ) The mark-to-market value of the gold hedge book at 31 December 2002 was negative A$693 million.

    ( 4 ) The mark-to-market value of the gold foreign exchange hedge book at 32 December 2002 was negative A$ 29.5 million

    12:54a ET Monday, September 9, 2002
    Interview with James Turk....

    Q: What don't you like?

    A: I don't recommend any Australian stocks
    now, simply because their hedge positions are
    underwater. Newcrest Mining is one pan; its
    hedge book is negative US$440 million. But my
    top pan is Australia's Sons of Gwalia. It has
    a US$340 million unrealized loss on its hedge
    book and is relatively more hedged than
    Newcrest, and its properties aren't as good.

    Q: Are they at risk of bankruptcy?

    A: There are two points of view. Some will
    argue that they don't risk bankruptcy because
    eventually they're going to produce the gold.
    In theory, that's true, as long as there's no
    operating problems. But they may receive
    pressure from the banks because the banks
    don't want the companies to carry these huge
    unrealized loss positions in the event of a
    disruption in the production of the gold. In
    1999, when gold rallied, we saw two mining
    companies -- Ashanti and Cambior -- go
    bankrupt in everything but name. Their hedged
    positions killed them. They were selling
    aggressively on the way down and got caught
    when gold rose to more than $300 an ounce.
    Now the question is: Who will be caught at
    $350 an ounce?

    Q: Thanks, James.


    Hedgebook clarification. US$ revenue to December 2005 is estimated by SGW at US$600m. US$ hedge commitments total US$460m (committed) and US260m (contingent). SGW estimate a mismatch of A$5m in 2003e and A$35m from 2003 to 2005. In our models we had assumed a mismatch of $10m in 2003 and $10m in 2004e. We are not adjusting our forecasts.

    Our conclusion is that as long as hedge counterparties remain rational (which we believe they will) SGW should be able to meet all its commitments when they fall due.

    Investment Risks

    Investment risks in mining equities include the volatile nature of commodity prices and currencies, exposure to political, financial and operational risks.

    Risks specific to Sons of Gwalia:

    Management fails to better communicate with the investment community and confidence takes longer to return (medium risk in our view)

    Gold falls short of production estimates (high risk in our view)

    Tantalum market fails to recover quickly thereby reducing sales volumes and US$ revenue (medium risk in our view)

    Hedge counter party attitudes change, requiring restructure of positions (high risk in our view if production forecasts are not met)


    Downgrades to earnings estimates and assessed valuation.


    SGW has had great difficulty in delivering on production forecasts. Two earnings downgrades in as many weeks has prompted concerns as to the ongoing viability of the business.

    What may change investor sentiment? We are looking for a production improvement in the gold division (and or the announcement of a credible joint venture partner to fund the Gwalia Deeps project). Recovery in tantalum demand (difficult to forecast) could allow SGW to increase sales volumes. We would view this as a major positive.

    The mismatch in revenue into the hedge book is estimated by SGW at about $40m out to 2005e. We believe that counter party banks will behave rationally and ALLOW THE COMPANY TO TRADE AS A GOING CONCERN. However SGW now needs to deliver on production forecasts or the risk profile could increase further.

    Despite achieving $595/oz for all gold sales, the profit margin was only $10/oz this quarter. Adjusting for capital, exploration and administration we believe that the gold division might only barely be cash flow positive during 02/03.

    SGW debt $350 million from what i can see,not including and hedging shortfalls.
    And here is a layout of all the hedgers--

    Gold Producers Short Gold Position % of Yearly Production Hedged

    checkout SGW

    Agnico Eagle 0%
    Ashanti 873%
    Aurion Gold 862%
    Aurora Gold 186%
    Anglogold 184%
    Barrick Gold 298%
    Cambior 309%
    Cameco 400%
    Durban Deep 67%
    Echo Bay 27%
    Freeport McM. 0%
    Glamis Gold 0%
    Goldcorp 0%
    Goldfields 0%
    GRD 964%
    Harmony 99%
    Hecla Mines 102%
    Hill 50 645%
    IAMGOLD 68%
    Inmet Gold 80%
    Kinross Gold 54%
    Lihir Gold 404%
    Meridan 0%
    Mim Holdings 135%
    Newmont/Norm. 124%
    Normandy NFM 407%
    Placer Dome 1202%
    Resolute 105%
    Rio Tinto 0%
    Sons of Gwalia 1157%
    Teck-Cominco+A16 95%
    TVX Gold 220%

    Hopefully that will help ppl understand that sgw is a very risky investment.

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