Bruised gold miners start hedging output, in a limited way – by Silvia Antonioli and Clara Denina (Reuters U.S. – March 14, 2014)

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LONDON, March 14 (Reuters) – Increasing numbers of gold miners, battered by last year’s drop in bullion prices, are selling planned output forward to help shore up their finances for stormy times, but these hedges are only for the short term.

Large miners and their shareholders typically rail against the practice of forward sales because locking in prices ahead of production closes off opportunities to benefit from a rise in the metal’s value.

That was particularly pertinent during the 2001-2012 gold bull run, when prices swept from around $260 an ounce to a record $1,920.30 in late 2011. But last year, a 28 percent dive in bullion prices caught producers by surprise, putting balance sheets under stress.

Now some miners are warming up to the idea of selling a portion of their gold a few months forward at a fixed price, banking and industry sources said, and investors seem to agree.

“I see a short-term hedge as a weapon in the arsenal of a financial director to protect the company and generate some short to medium-term security,” said Markus Bachmann, manager of precious metals and global resources funds at Craton Capital.

“In a gold price environment that is a little bit shaky, as it was in the last six to eight months, you need certainty. So we say: fine. We accept that, as long as you don’t lock in too much production for a long period of time.”

London-listed Hochschild Mining Plc and Canadian miner Detour Gold, for example, announced this year they would open new hedges, mostly to help finance new projects and pay off debt.

Heavily indebted Petropavlovsk, one of the very few companies to put hedges in place before the price collapse last year, said it would continue to do so while prices remain volatile.

“We decided to hedge around 50 percent of the yearly production … It is all short-term hedging lasting about one year,” Petropavlovsk Chief Executive Peter Hambro told Reuters.

“Once you have built your hedge book, it is really not that different than selling spot … it does mean that you have a degree of certainty over the next financial year that makes running the company easier.”

Russia’s biggest gold miner, Polyus, is also looking at using this instrument to control its balance sheets more tightly, industry sources said. Polyus declined to comment.

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