Newcrest hedges Telfer mine output

The increase in the Australian gold price to near 10-year highs has prompted Newcrest to take out price protection.

The increase in the Australian gold price to near 10-year highs has prompted Newcrest to take out price protection by hedging future production.

But unlike its previous hedging activities which cost billions of dollars in forgone revenue before being closed out at a cost of $1.67 billion in 2008, the latest hedging is restricted to partial hedging of production at the Telfer mine in Western Australia.

Hedging removes full upside exposure to the gold price and after the industry-wide hedging losses in the early 2000s in a rising gold price environment, it became frowned upon by investors.

But in the case of the high-cost Telfer operation, it will help to ensure that the cost of work needed to extend the life of the 520,000 ounce-a-year operation will be covered by locking in the historically high local gold price.

Newcrest has hedged a total of 530,000 ounces of gold production over three years at an average price of $1737 an ounce. The hedging is already “in-the-money’’ given the local price on Friday was $1615 an ounce.

The rise in the local price to near 10-year highs is due to a combination of a recovery in US dollar prices from the 2015 low of $US1050 an ounce to $US1216 an ounce, and the amplifying affect of the fall in the US exchange rate.

“Having regard to the recent favourable spot and forward prices the board felt it prudent to secure margins on a portion of future production, which in turn will help support the investment in future cutbacks and mine development,’’ Newcrest said.

It said that further hedging of the mine’s output could be undertaken in the future.

Newcrest finance director Gerard Bond said the near 10-year high in local prices meant it was an “appropriate moment to lock in the price of a portion of Telfer’s future production’’.