Global hedGe book analysisQ1 2014

July 2014

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GOLD RESEARCH

Table oF ConTenTs

key Points 4

introduction 4

Market Commentary 5

Company activity 7

Composition & sensitivity of the Global hedge book 8

outlook 10

Technical annex 11

Glossary 12

about the GFMs Team at Thomson Reuters 13

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THOMSON REUTERS - JULY 2014

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4Q1 2014

key PoinTs The first quarter saw a modest delta-adjusted

addition of 278 koz (9 t), or 11% quarter-on-quarter. both the forwards and options portions of the

book increased. This was the first increase in the hedge book

since a fractional gain in Q3-2012. at end-March the hedge book volume stood at

2.80 Moz (87 t). several producers added hedge cover in Q1

though on balance hedges were over short tenors and relatively modest in scale.

The largest hedge of the quarter was undertaken by oceanaGold, by way of a collar structure against its Macraes mine.

The extent to which the hedge book was an asset contracted quarter-on-quarter, but retained a positive marked-to-market value of $194 million at end-Q1.

all of the activity recorded for Q1 is dwarved by activity announced on 3rd July of new hedging by Polyus Gold.

inTRodUCTionGold producers hedging activity in Q1 2014 edged over to the supply side of the market for the first quarter since 2012, with just 0.28 Moz (9 t) added to the global hedge book in the three months to end-March. Fresh hedging of both options and forwards by a small group of emerging producers fractionally outweighed the compensating factors of ongoing deliveries and option delta effects.

The hedge book in total grew by 11%, with gold hedged against the delta-adjusted options book some 15% higher than at end-2013. a 10%

growth in the aggregate forward sales position was driven by a small group of companies, in the main over relatively short tenors. several miners put new hedges in place over 2014 and hedged not as a mandate attached to project finance but rather to use hedging simply to offer greater income stability during a period of greater cash flow uncertainty. This included a move by one producer, northern star Resources, to hedge part of its production following the acquisition of several comparatively leveraged assets. in the case of detour Gold, hedging was undertaken to offer a more clear projection of revenue whilst production is ramped up at its substantial detour lake mine (at which costs should fall as steady-state production is achieved).

Concerning the rise in options position, the stand-out influence came from OceanaGold, which added a collar structure covering 208,000 ounces against production from its Macraes mine. The effect of this new options hedge countered an overall drop in delta against the options book. as the gold price rose to end-Q1, the delta hedge against producers bought puts (which were on balance close-to-the-money) fell aggressively. Meanwhile many of the call options, which were written at much higher strike

neT iMPaCT oF PRodUCeR hedGinG evolUTion oF The Global hedGe book

CoMPosiTion oF The delTa-adJUsTed Global hedGe book

Change (Moz) 13.Q4 14.Q1 q-o-qForwards & Gold loans 2.07 2.28 10% options 0.45 0.52 15%Total 2.53 2.80 11%note: Totals may not add due to independent rounding. numbers are provisional and may be revised. some companys positions are not reported on a quarterly basis and in these cases we have made estimates.source: GFMs, Thomson Reuters

-7

-5

-3

-1

1

3

14.Q112.Q110.Q108.Q106.Q1

Moz

Source: GFMS, Thomson Reuters

SupplyGold Price

200

600

1000

1400

1800

Demand

US

$/oz

0

1

2

3

4

5

6

14.Q113.Q112.Q1

Moz

Source: GFMS, Thomson Reuters

Forwards & Gold Loans

Options

5Q1 2014

prices, remained deeply out-of-the-money, and were less impacted by the rally in the gold price.

Although this represents the first quarter of net hedging for over a year, recent activity announced by Polyus Gold on 3rd July indicates that this will be dwarved by fresh hedging in Q2, during which period most of the contracts appear to have been structured. This certainly represents the most significant hedging activity since the actions of 2008 and 2009 when angloGold ashanti and barrick Gold eliminated their hedge books. analysis of the scale of Polyus hedging activity and its market impact will be published on Thomson Reuters eikon in the coming days.

MaRkeT CoMMenTaRyafter gold registered its largest annual decline in 32 years, the sentiment in the market at end-december was pointing towards further losses over 2014. However, with hindsight, the first few sessions proved to be indicative of the quarter ahead after an array of technical levels were broken to the upside.

Gold was off to a good start in 2014, opening at $1,225/oz, nearly $21 above the year-end close. investors were reassured of the importance of the key psychological support level at $1,200 as lower prices spurred Chinese physical demand. during 2013, this key level was touted by many as the marginal cost of gold production, which further explained its importance. on 8th January gold fell below the year-open and placed the low for the remainder of the quarter at $1,221. in the following days speculation grew around a delay in the Federal Reserves tapering of its asset purchases programme after Us nonfarm payroll data fell short of expectation. This saw gold rally as the dollar

index came under pressure on the back of the most successful 30-year Us bond auction since February 2013. as yields continued to plummet into mid-January, premiums on the shanghai Gold exchange (sGe) showed Chinese demand was steadily building up to the lunar new year on 31st January.

The negative correlation between equities and gold strengthened significantly in January after the s&P500 posted its best yearly increase since 1997. on 25th January, gold broke above $1,260 and posted its largest one day rally in three months, as equity markets corrected sharply on the back of strong european manufacturing data. Russian Cds spreads widened to four month highs as equity markets continued to fall causing the Turkish lira and Russian ruble to further depreciate. Further support for gold came from south africa as 70,000 aMCU platinum workers went on strike as the rand continued to depreciate to its lowest level since october 2008. yet on 30th January gold dropped nearly $22, following a pullback in the Federal Reserves stimulus programme in light of robust Us economic data.

Gold eTF holdinGs Gold PRiCe

PRiCes (QUaRTeRly aveRaGe)

13.Q4 14.Q1 ChangeUs$/oz 1,276.16 1,293.06 1%Us$/oz 12-mth rolling 1,411.23 1,327.42 -6%euro/kg 30,097 30,297 1%Rand/kg 416,547 451,035 8%yen/g 4,120 4,273 4%Rupiah/g 478,733 492,005 3%Turkish lira/g 83.04 91.99 11%Renminbi/g 249.90 253.62 1%Rupee/10g 25,450 25,674 1%Rouble/oz 41,518 45,287 9%a$/oz 1,376.49 1,442.31 5%source: Thomson Reuters

1150

1225

1300

1375

1450

01-Jun-1401-Apr-1401-Feb-1401-Dec-13

US

$/oz

Source: Thomson Reuters

Min: $1,195/oz (p.m. fix)

Max: $1,385/oz (p.m. fix)

55

57

59

61

63

65

01-Jun-1401-Apr-1401-Feb-1401-Dec-1301-Oct-13Source: GFMS, Thomson Reuters

65

70

75

80

85

90

Moz

Value

US

$bn

6Q1 2014

In the first two weeks of February, gold rose over nine straight sessions, after fears of a slowdown in the manufacturing sector in the US were confirmed. new orders dropped to a 33 year low, causing the dollar index to tread water, while CoMeX gold futures for February delivery posted trading volumes 10% above the 250-day average. by 11th February, gold hit a three month high following comments from Federal Reserve Chair Janet yellen which reiterated that interest rates would remain near zero for the time being. her comments were followed by a wave of technical buying and short covering activity which took gold from $1,282 to $1,327. attention soon shifted to the FoMC minutes, which hinted at a rate hike in 2015 as recent jobs reports were well below past monthly gains. Though it was suggested by some that the sluggish economic results may have been due to exceptionally cold weather, gold investor sentiment turned positive closing the month at near the monthly high of $1,339.

Markets were unsettled on 3rd March, when Ukraine accused Russia of sending additional troops to Crimea, causing Russian stocks and bonds to plummet. as military tensions escalated, gold and crude oil rose to a four and six month high respectively. The safe haven appeal of gold was strong, and prices were gaining momentum after breaking above $1,350 on 12th March. The tone in the market continued to draw investors towards gold amid growing speculation around possible trade sanctions against Russia. This, along with renewed concerns of an economic slowdown in China, caused precious metals to climb as safe-haven bidding continued until 14th March, when gold reached the year-to-date high of $1,385.

over the second half of March gold traded in a narrow downward trend channel as the Us dollar rallied, following Federal Reserve comments on

revamping its rate guidance. The sell off was further intensified after Russian President Vladimir Putin signed a treaty on the annexation of Crimea. Thereafter geopolitical risk started to ease, which played a major role in golds descent by $94 to $1,291.75 by month end.

on the back of a weaker Us dollar, treasury yields began an early descent in april as gold rose from $1,277 to $1,327. However, a strong ETF outflow was able to offset earlier gains from renewed Ukraine tensions causing crude oil and gold to trade lower in tandem. Gold oscillated between $1,281 and $1,311 until 27th May when news hit the market about a potential rate cut by the european Central bank. views of a possible economic rebound in Us caused gold to fall over the next seven trading sessions after Us manufactured goods and home prices inched higher. over the month of June gold rose from $1,240 to $1,320, posting its largest gain since February on 19th June after short covering ensued as the Federal Reserve showed lack of commitment to raise interest rates. Thereafter, gold prices recovered much of the ground lost in the first two months of the quarter. interestingly over the

iMPlied Gold boRRoWinG RaTes ConTanGo & FoRWaRd PRiCe

sPeCUlaTive neT PosiTions in CoMeX FUTURes

0

30

60

90

120

150

06-May-1404-Mar-1407-Jan-1405-Nov-1303-Sep-13

Net

Pos

ition

s (c

ontra

cts,

thou

sand

s)

Source: CFTC *Combined non-commercial & non-reportable positions

1150

1225

1300

1375

1450COMEX Price

CO

ME

X S

ettlement P

rice (US

$/oz)

-0.2

0.0

0.2

0.4

0.6

0.8

01-May-1401-Mar-1401-Jan-1401-Nov-1301-Sep-13

%

Source: LBMA, Thomson Reuters *LIBOR-GOFO

3-Month*12-Month*

1150

1250

1350

1450

01-May-1401-Mar-1401-Jan-1401-Nov-1301-Sep-13

US

$/oz

Source: LBMA, Thomson Reuters

Forward Price (LHS)Contango (RHS)

0.00

0.05

0.10

0.15

0.20

%

7Q1 2014

month of June, the monthly correlation between the s&P500 and gold went from -0.8 to +0.8, causing gold to lose its appeal as hedge amongst investors.

CoMPany aCTiviTyThe first quarter of 2014 saw hedging return to the supply side of the market, albeit on a modest scale. Following five consecutive quarters of net de-hedging, we saw the global producer hedge book grow by nine tonnes in Q1, reaching a delta-adjusted total of 87 tonnes at quarter-end, an 11% increase on the end-2013 hedge book total.

For the first time since Q3 2012, new hedging activity outweighed deliveries into existing contracts over the period. While 18 companies reduced their delta-adjusted hedge books by a collective 10 tonnes, a further 17 companies expanded their positions by a total of 19 tonnes during the period.

The largest new hedge position of the quarter was entered into by oceanaGold, who entered into a zero-cost collar hedge covering 208 koz (6 t) of production from its Macraes mine over the next two years, with put options at nZ$1,500/oz and call options at nZ$1,600/oz. northern star Resources, which has already acquired a number of assets during 2014, including the former barrick Gold mines, kanowna and Plutonic, sold forward 100 koz (3 t) (some of which had already been delivered

by end-Q1) at a$1,462/oz, over 12 months, an estimated 28% of production for the period. detour Gold was another of the more significant new hedgers for the period, having entered into a series of both Usd and Cad denominated forward sales during January 2014. The 70 koz (2 t) outstanding at the end of Q1 represents approximately 20% of forecast sales for the remainder of this year. during March, silver lake Resources entered a forward sales agreement for 50 koz (2 t) at an average price of a$1,536/oz, for delivery over the year from april 2014. This represents approximately 30% of forecast production over the period, and was undertaken in order to secure a favourable margin on the processing of low-grade stockpiles.

some smaller hedge contracts were also entered into during the first quarter by miners who have recently commenced production. doray Minerals, which poured first gold from its Andy Well operation in august 2013, undertook an additional 39,651 oz (1 t) of hedging, for delivery between october 2014 and september 2015, at a gold price of a$1,505/oz. In addition, Alkane Resources achieved first gold poured at Tomingley in February, and entered into forward sales of 25 koz (1 t) at a$1,449/oz, for delivery in May 2014. a number of the other expansions in producer hedge books during the quarter were due to increases in delta-adjusted options positions.

The more significant decreases in hedge book volumes during Q1 came from producers such as Petropavlovsk and saracen Mineral holdings, both of whom are estimated to have continued delivering into existing contracts.

during the second quarter of 2014 Millennium Minerals added to its existing hedge position as part of a revision to its project finance arrangements.

Global hedGe book MaRked-To-MaRkeT

(delta-adjusted, spot basis) % of gross: Change Company Hedging (koz)oceanaGold 26% 155.3northern star Resources 14% 83.4 detour Gold 12% 70.0 De-hedging (koz) Petropavlovsk 22% 69.8sumitomo Metal Mining 10% 33.2 saracen Mineral holdings 10% 30.6 note: delta-adjusted volumes are calculated on the basis of published company data. as such disclosures are not exhaustive, the GFMs calculated position may not exactly correspond to the delta-position reported by the company. in addition, GFMs values the contracts on a spot delta basis, whereas some companies report on a forward delta basis. This can lead to minor discrepancies between the calculated and delta-adjusted volumes. Where published data was unavailable, an estimate based on the scheduled expiry of contracts has been made. source: GFMs, Thomson Reuters

ToP (de-)hedGinG aCTiviTy in 14.Q1

-12

-10

-8

-6

-4

-2

0

2

14.Q113.Q112.Q111.Q110.Q109.Q108.Q1

US

$ bi

llion

US

$/oz (inverted)

South Africa

North America

Latin America

Other

Australia

China

South Africa

North America

Latin America

Other

Australia

China

-1800

-1600

-1400

-1200

-1000

-800

-600

-400

Gold Price (end-period)

Marked-to-Market

Source: GFMS, Thomson Reuters

8Q1 2014

a further 60 koz (2 t) of forward sales have been added, resulting in a total forward sales position that covers an estimated 70% of production to June 2016, at an average price of a$1,513/oz. however, beadell Resources took the opportunity to close out its remaining hedge position during Q2, booking a profit of approximately $16 million by doing so.

The recent announcement from Polyus Gold represents the largest individual new hedge of recent years, and will have a significant effect on the global hedge book. The program is intended to provide price protection for the construction-stage natalka project, and encompasses both forward sales and zero-cost asian collars, over a four year period.

The end-Q1 gold price of $1,283/oz (CoMeX settlement), an increase of $82/oz on the end-Q4 price, resulted in an increase in producers unrealised marked-to-market liabilities. although the global marked-to-market value of the hedge book remained an asset at the end of Q1, it fell by $165 million to a net asset of $194 million.

CoMPosiTion & sensiTiviTy oF The Global hedGe bookThe first quarter of 2014 saw a return to net hedging, with the delta-adjusted global producer hedge book growing by a modest 278 koz (9 t). This was largely due to a 211 koz (7 t) net increase in the forwards portion of the hedge book, as deliveries into existing contracts were outweighed by new hedges by producers including northern star Resources, detour Gold and silver lake Resources, which collectively entered into approximately 220 koz (7 t) of forward sales agreements during the period. The delta-adjusted options portion of the hedge book increased by 67 koz (2 t), as maturity of existing contracts held by producers such as Minera Frisco and orvana Minerals was outweighed by increases in delta-adjusted positions of other producers, notably oceanaGold, who added a zero-cost collar

covering a nominal 208 koz (6 t) during Q1.

in nominal terms, the global hedge book volume grew by 14%, to 4.34 Moz (135 t). The nominal options position increased more than the forward sales position, with quarter-on-quarter gains of 332 koz (10 t) and 211 Moz (7 t) respectively. Consequently, the nominal composition of the producer hedge book stood at 53% forwards and 47% options at the end of Q1, compared to 55% forwards and 45% options at the end of 2013. however, it should be noted that a significant proportion of the outstanding options contracts are collar structures, and the number of ounces of gold production covered by these hedges is somewhat lower than the nominal figure suggests.

The amount of gold delta-hedged against the options book saw an overall increase during the first quarter of this year. The rising gold price meant that bought put options moved further out-of-the-money, with a corresponding decrease in gold delta-hedged against them. however, the

noMinal hedGe book CoMPosiTion

sensiTiviTy oF The oPTions book 14.Q1

Move in Move in Gold Price volatility (Us$/oz) (%) -400 -300 -200 -100 0 +100 +200 +300 +4008 0.85 0.78 0.71 0.65 0.60 0.58 0.60 0.63 0.686 0.86 0.79 0.71 0.64 0.58 0.56 0.57 0.61 0.674 0.87 0.80 0.71 0.63 0.56 0.54 0.55 0.59 0.652 0.87 0.80 0.72 0.62 0.54 0.51 0.53 0.57 0.640 0.88 0.81 0.72 0.61 0.52 0.48 0.50 0.56 0.63-2 0.89 0.82 0.73 0.60 0.50 0.45 0.48 0.54 0.62-4 0.90 0.83 0.73 0.60 0.47 0.42 0.45 0.52 0.60-6 0.92 0.85 0.74 0.59 0.45 0.39 0.43 0.51 0.59-8 0.93 0.86 0.75 0.59 0.42 0.36 0.42 0.50 0.58source: GFMs, Thomson Reutersnote: The matrix above shows the sensitivity of the delta-adjusted hedge book at end-Q1, under different gold prices and volatilities, assuming all other factors remain equal. The delta-adjusted total options book at the end of 14-Q1 was calculated at 0.52 Moz, based on the end quarter gold price of $1,283/oz, and proprietary socit Gnrale market rates.

Source: GFMS, Thomson Reuters

13.Q4 Nominal Volume: 3.80 Moz (118t)

14.Q1 Nominal Volume: 4.34 Moz (135t)

Forwards& Loans

Net Calls

Net Puts

9Q1 2014

addition of new contracts during the quarter resulted in an overall small increase in the amount of gold delta-hedged against the total put option component of the hedge book. Meanwhile, quarter-on-quarter, the sold call contracts moved less deeply out-of-the-money, on a combination of the higher gold price and new contracts lowering the weighted average strike price.

The sensitivity matrix on the previous page provides a snapshot of how the volume of gold delta-hedged against the options portion of the global hedge book would have changed as a function of volatility and gold price, assuming all other market factors remained constant at end-March. The matrix indicates that, over this range of scenarios, the bought put portion of the producer hedge book is more sensitive to price moves than the sold call contracts. as outlined in the chart above, at constant volatility, a $400/oz fall in the gold price would have led to the volume of gold hedged against the options book increasing by almost 70%, whereas a $400/oz gold price increase would have increased

the amount of hedging against the options book by only 21%.

The weighted average strike price of bought put contracts denominated in Us dollars increased quarter-on-quarter, whereas the average strike price of Usd sold calls fell over the period. Comparison of the charts below indicates that this was due to the addition of bought put contracts in the Us$1,301-1,400/oz range, raising the average price. Meanwhile, some of the higher-priced sold call contracts have expired during Q1, while additional contracts at lower strike prices have been added. For forward sales contracts, the weighted average strike price fell slightly quarter-on-quarter, for both Usd and aUd-denominated contracts.

The spread between the bought put and sold call weighted average strike prices narrowed by Us$105/oz quarter-on-quarter; however, with an average gold price for Q1 of Us$1,294.96/oz (PM fix), the options portion of the hedge book continues to function more as downside protection than as a cap to price upside. The extra margin gained from forward sales contracts has, on average, decreased by over Us$30 since Q4 2013 and this effect was even more pronounced for aUd-denominated contracts, due to the fall in the Q1 average gold price in aUd terms to a$1,444.01/oz.

end-14.Q1 delTa-adJUsTed oPTions book ConTRaCT WeiGhTed aveRaGe sTRike PRiCes

(weighted by number of contracts) USD AUDbought Puts $1,178/oz $1,348/ozsold Calls $1,722/oz $1,628/ozForward sales $1,341/oz $1,536/ozsource: GFMs, Thomson Reuters

disTRibUTion oF oPTion ConTRaCTs by PRiCe, koZ

0.0

0.2

0.4

0.6

0.8

1.0M

oz

Source: GFMS, Thomson Reuters

Call Options

Put Options

1,2831,083883 1,483 1,683US$/oz

600 300 0 300 600

600 300 0 300 600

701-800801-900

901-1,0001,001-1,1001,101-1,2001,201-1,3001,301-1,4001,401-1,5001,501-1,6001,601-1,7001,701-1,8001,801-1,9001,901-2,0002,001-2,1002,101-2,2002,201-2,300

koz0 300 600

701-800801-900

1,201-1,300

1,401-1,500

1,601-1,700

1,801-1,900

2,001-2,1002,101-2,2002,201-2,300

US

$/oz

US dollar denominated contracts, Q1 14

Source: GFMS, Thomson Reuters

Bought Put Options

Sold Call Options

600 300 0 300 600

600 300 0 300 600

701-800801-900

901-1,0001,001-1,1001,101-1,2001,201-1,3001,301-1,4001,401-1,5001,501-1,6001,601-1,7001,701-1,8001,801-1,9001,901-2,0002,001-2,1002,101-2,2002,201-2,300

koz-600 -300 0 300 600

701-800801-900

901-1,0001,001-1,1001,101-1,2001,201-1,3001,301-1,4001,401-1,5001,501-1,6001,601-1,7001,701-1,8001,801-1,9001,901-2,0002,001-2,1002,101-2,2002,201-2,300

US

$/oz

US dollar denominated contracts, Q4 13

Source: GFMS, Thomson Reuters

Bought Put Options

Sold Call Options

10

Q1 2014

oUTlookCompared to the final quarter of 2013, the number of companies entering into hedging early this year increased notably (although modest in scale), with 17 producers recording net-hedging on a delta-adjusted basis. The largest activity in the first quarter was seen by oceanaGold, with a zero-cost collar structure covering 208 koz (6 t), followed by northern star Resources which sold 100 koz (3 t), or 28% of the companys projected full year production forward. similarly, four other producers (detour Gold, doray Minerals, b2 Gold Corp and silver lake Resources) collectively hedged over 7 t. While the theme across the gold mining sector continues to be that maintaining un-hedged status, focus across the industry is centering principally on a number of cost containment initiatives.

Whilst a large proportion of the gold mining industry continues to be loss-making at prices of $1,320, some of the largest producers have sought to restructure their portfolios through the divestment of higher cost assets. of the major restructured portfolios, barrick Gold has continued the rationalization initiated in 2013 to sell off non-core assets including kanowna and Plutonic while newmont sold Jundee. although considered non-core for these major producers, in making these acquisitions, their counterparty, junior miner northern star Resources, is consequently due to increase annual production from 100 koz to 550 koz at an acquisition cost of less than a$200 million. To fund this growth, northern star raised $100 million through an equity placement and a further $28.9 million through a share purchase plan. Perhaps in recognition of the relatively leveraged nature of the

assets, the company hedged 100 koz (3 t) of near-term production, at a strike price of a$1,462/oz.

as we have observed over the past 12 months, the incentive for widespread hedging has been, and continues to be, subdued while prevailing contango remains very modest and a large proportion of the industry is loss making on an all-in Cost basis. Rather than hedge output and establish a rigid sales price floor, the industry appears focused on portfolio optimization and proactive cost-cutting, often involving revisited mine plans following last years re-calculation of reserves following the severe fall in metal prices. These mine plan changes have invariably raised cut-off grades and resulted in higher grade ore processing, such as seen at Penasquito, and are beginning to have the effect of lowering unit costs. Responsible capital deployment remains a major focus as a number of projects no longer pass the required return on investment hurdle rates and have been curtailed or deferred.

The 2014 delivery profile suggests just 1.5 Moz (48 t) of hedged gold will come off the book. This will be more than outweighed by recently announced hedging activity (below). In addition, project finance hedging remains an obvious route for some smaller companies, or companies without ample balance sheet flexibility, seeking to develop quality assets. Roxgold inc recently announced that it had reached a mandate for a $75 million senior debt facility involving hedging some 8.5% of yaramokos current reserves. similarly, Millennium Minerals secured a senior debt facility requiring the company to hedge a further 60 koz. Most notably, at the time of writing, Polyus Gold has entered into a series of zero cost collars and gold forwards covering 2.83 Moz (88 t) of production over a four year period. This hedge will enable the remaining development of natalka without placing further pressure on the companys balance sheet.

although Polyus hedge is substantial, it is worth stressing that this strategy was undertaken to improve the prospects of robust return on investment at the front-end of this world-class mines life. We would not suggest that this activity, which is project-related is necessarily a sign of things to come across the broader industry whilst gold prices and contango provide unattractive hedging conditions.

14.Q1 deliveRy PRoFile

0.0

0.3

0.6

0.9

1.2

1.5

1.8

20182017201620152014

Moz

Source: GFMS, Thomson Reuters

Forwards & Gold Loans

Options

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Q1 2014

TeChniCal anneXThe GFMs team at Thomson Reuters analysis calculates the delta-adjusted global hedge book from a suite of market data and proprietary tools from Thomson Reuters eikon. each mining companys individual trades are captured on a quarterly basis.

each option trade is entered by mid-year of expiry and are modelled as european options. Moreover, non-vanilla products such as convertible forwards have been broken down into their constituent options. This analysis enables us to accurately obtain key parameters and valuations for each instrument used by each company and subsequently for the global hedge book as a whole. This methodology also allows us to model the delivery profile of the hedge book.

all forward contracts, including spot deferred, floating rate forwards and fixed rate forwards, are input as forward sales. options contracts, including cap and floor agreements, are entered as their constituent vanilla put and call contracts. Convertible and contingent options are unbundled into their constituent barrier options contracts. Trigger levels for barrier options are taken as the mid-point of published ranges, where available. Convertible forward contracts are modelled as a barrier call option combined with a vanilla put option.

in terms of the GFMs analysis, the key parameter of interest is the delta-adjusted position. as explained in the glossary, the delta of an option (or indeed of a forward) is the rate of change in the value of the derivative for a change in the price of the underlying. in the case of a gold forward sale (or purchase), the forward delta is 1, whilst in the case of an option, this delta is derived from the black-scholes option pricing formula.

The counterparties to mining companies hedging activity (typically banks) will dynamically hedge their exposure through delta hedging. For example, suppose a mining company purchases a put option. The writer of the option (a bank) will be long the delta volume. in other words, if the delta of the option is +0.5 and the nominal volume of the trade is 100,000 ounces, the delta volume will be 50,000 ounces (of which the bank will be long). To hedge this exposure, the bank must therefore undertake a transaction that yields an equal and opposite position (i.e. short). This will typically be achieved

by the bank borrowing gold (normally from a central bank) and selling this into the spot market. Through this mechanism, mining companies hedging activities impact directly on the spot gold market.

it should be borne in mind that the value of an option, as well as the delta, will change in response to movements in key parameters, particularly the spot gold price, but also market volatility, interest rates and time to expiry. in response to this, banks will continuously or dynamically adjust their delta hedge position.

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Q1 2014

GlossaRyoption - an option contract gives the holder the right, but not the obligation, to buy or sell gold at a predetermined price on or by an agreed date.

european option - an option that can only be exercised at the expiry date.

american option - an option that can be exercised at any time prior to the expiry date.

Put option - an option contract which gives the buyer the right, but not the obligation, to sell a specified amount of gold (or other asset) at a predetermined price (the strike price) on or before a specified date (expiry date).

Call option - an option contract which gives the buyer the right but not the obligation to buy a specified amount of gold (or other asset) at a predetermined price on or before the expiry date.

barrier option - an option whose outcome depends on the performance of the price of the underlying during the life of the option and whether that price breeches a predetermined barrier.

Forward - a transaction in which two parties agree to the purchase and sale of gold at a future date.

Gold lease Rate - The cost of borrowing or return from lending gold, the daily level of which reflects the supply and demand for metal in the lending market.

Writer - The writer or grantor is the party who sells the option and receives that premium income.

long - a position in an asset (e.g. gold) for which the value will rise should the price of that asset rise.

short - a position in an asset (e.g. gold) for which the value will fall should the price of that asset rise.

delta - The rate of change of the price of a derivative with the price of the underlying asset.

Gamma - The rate of change of delta with respect to the asset price.

Theta - The rate of change of the price of a derivative with the passage of time.

vega - The rate of change of the price of a derivative with volatility.

Rho - The rate of change of the price of a derivative with the interest rate.

Greeks - The basket term for the above hedge parameters (delta, theta, vega, gamma, rho).

Underlying - shortened term for the underlying commodity on which forwards and options are traded (i.e. in this case gold).

delta hedging - a hedging scheme that is designed to make the value of a derivatives portfolio insensitive to small changes in the price of the underlying.

black-scholes Model - a model for pricing european options. developed by Fischer black, Myron scholes and Robert Merton. see F. black and M. scholes The Pricing of options and Corporate liabilities Journal of Political economy 81, 1973 and R.C. Merton Theory of Rational Pricing bell Journal of economics and Management science 4, 1973.

vanilla/non-vanilla - vanilla options are simple put and call options, whilst non-vanilla options are more complex, with pay-offs dependant on a variety of market factors, such as price paths or the price of alternative assets.

volatility - a measure of the uncertainty or rate of change of an asset price.

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Q1 2014

aboUT The GFMs TeaMwww.thomsonreuters.com http://commoditiesupdates.thomsonreuters.com

The GFMs team at Thomson Reuters is recognised as one of the worlds leading economics consultants in precious metals, specialising in research into the global gold, silver, platinum and palladium markets. it is also a leading provider of top quality research on base metals and steel. GFMs analysts present regularly at international conferences and seminars on precious metals and commodities and are frequently quoted in the media for their views on the gold, silver and PGMs markets.

GFMs is credited with producing the most authoritative surveys of the gold and silver markets, the annual GFMs Gold survey and World silver survey, and GFMs gold and silver supply/demand data forms the global benchmark; the international gold and silver markets are largely dependent on GFMs statistics. The GFMs team at Thomson Reuters also produce a range of other publications dealing with all aspects of the precious metals markets, and provide consultancy services in the form of tailor-made research into selected areas of the precious metals markets.

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Q1 2014

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PRodUCeR hedGe books 14.Q1

(koz) Net Nominal Delta-adjusted Company Totals Forwards Options Total Options TotaloceanaGold 0 554 554 225 225Regis Resources 191 50 241 33 224Petropavlovsk 209 0 209 0 209b2 Gold Corp 192 32 224 4 196evolution Mining 185 0 185 0 185boliden 160 0 160 0 160saracen Mineral holdings 149 0 149 0 149beadell Resources 145 48 194 0 146yukon nevada Gold Corp 139 0 139 0 139Perseus Mining 129 0 129 0 129endeavour Mining 91 15 106 15 106northern star Resources 83 0 83 0 83PanTerra Gold 81 0 81 0 81detour Gold 70 0 70 0 70Minera Frisco 0 196 196 67 67dundee Precious Metals 58 0 58 0 58doray Minerals 57 0 57 0 57Millennium Minerals 51 0 51 0 51silver lake Resources 50 0 50 0 50orvana Minerals 16 96 112 33 50lonmin 43 0 43 0 43independence Group 0 221 221 41 41endomines 39 0 39 0 39hochschild Mining 33 0 33 0 33st barbara Mines 0 107 107 33 33Petaquilla Minerals 26 0 26 0 26sumitomo Metal Mining 0 461 461 25 25alkane Resources 25 0 25 0 25shanta Gold 24 0 24 0 24Penoles 0 192 192 22 22Coeur Mining 0 75 75 19 19luna Gold 17 0 17 0 17First Quantum Minerals 14 0 14 0 14american bonanza 3 0 3 0 3Comstock Mining 0 9 9 2 2anaconda Mining 2 0 2 0 2atna Resources 1 0 1 0 1

source: GFMs, Thomson Reuters, Company Reports*Where companies have not reported hedge positions, we have made reasonable estimates based on available data. Totals may not add due to rounding. negative numbers indicate a long contract position.

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