Gold miners are being offered hedging contracts at close to $3000, says Northern Star boss
The price of gold is skyrocketing and miners say the forward contracts on offer suggest it could soon hit the record levels reached in early 2020 when Covid-19 smashed markets.
Australian gold miners are being offered hedging contracts at close to $3000 an ounce as bankers bake in higher inflation and rising interest rates.
Northern Star Resources boss Stuart Tonkin said on Thursday the company was being offered hedges worth $2950 for gold delivered in three years, $300 an ounce ahead of spot prices of about $2650.
Speaking on the sidelines of the Melbourne Mining Club, Mr Tonkin said forward hedging contracts on offer were escalating at about $100 a year above the spot price as central banks pushed up interest rates to control soaring inflation in developed countries, well ahead of previous rates on offer.
“You typically only pick up $20 or $30 a year in a low interest environment. And now you‘re seeing a bit of a ski ramp $100 a year forward,” he said.
“That’s because the interest rate increases are being calculated into bankers’ cost of money holding that gold contract.”
Northern Star has a policy of hedging about 20 per cent of its production for the next three years. The Australian gold major said in its annual financial statements, released in August, it would deliver 439,000 ounces of gold at an average $2411 an ounce in the current period.
Its remaining hedge book requires the delivery of 700,000 ounces over the next two years, at an average $2640 an ounce.
The price of gold in Aussie dollar terms shot up from $2500 an ounce to $2654 on Thursday evening as the US dollar strengthened against other global currencies. But the forward contracts on offer suggest the gold price could soon top record levels around $2800 an ounce, reached in early 2020 as Covid-19 spooked markets.
Mr Tonkin said Northern Star had not been tempted to lock in more gold at elevated prices on offer, but would stick with its current hedging policies, given inflation is pushing up the company’s production costs.
“You can’t hedge your costs. So it’s not about trying to determine an outcome. It’s around managing the things you’ve been doing – so we took on acquisitions and had debt, we’ve got capex, and we wanted to ensure we got the returns on investment from that capital,” he said. “We still keep the hedge book at 20 per cent (of future production). It just means we’ve got some buffer. When the gold price does move it is often a shock, and we just want to make sure that we can manage through any of those type of rapid shocks.”
While labour markets in WA were still tight, Mr Tonkin said the company had not seen much evidence the skills crisis was still gathering pace, but rising energy prices had put additional pressure on costs at the company’s Australian and US operations.
“Gold goes up, down or sideways. So we’ve focused on what we can control – productivity and unit costs,” he said.