New Gold Inc. was braced for a vicious backlash from the investment community when it decided to hedge some gold production earlier this month.
After all, hedging is the gold industry’s ultimate dirty word. It became such a toxic subject during the last decade that most chief executives decided that even talking about it was off limits. And New Gold is led by Randall Oliphant, who headed up Barrick Gold Corp. back when it had the biggest — and most reviled — hedge book in the business.
But the response to New Gold’s move wasn’t negative. Instead, almost everyone cheered. “We’ve heard nothing but positive reactions from shareholders, analysts and media people to what we did,” said Oliphant, New Gold’s executive chairman. “So that will give other people who want to do this sort of stuff some ammunition.”
New Gold’s hedge position is pretty minor in the grand scheme of things. The Toronto-based miner entered option agreements to sell 270,000 ounces of gold at prices no lower than US$1,200 an ounce.
New Gold is spending a hefty US$500 million on an Ontario gold project in 2016, and this small hedge position simply ensures that it can build the mine and maintain a healthy balance sheet even if gold prices go in the tank.
Still, this deal violated one of the industry’s biggest taboos and it took some nerve for New Gold to do it. But the warm reception it received, combined with the recent rally in gold prices, suggest there could be a lot more hedging to come.
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