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Global hedGe book analysis15.q1
July 2015
armelle.arghiropoulos
soCieTe GeneRale commiTTeD To PRecious meTAls
a PaRTneR you cAn Rely on WiTh a WoRldWide seRvice
A2 Moody’s2 A standard & Poor’s2 A Fitch2
commoDiTies: A LONGSTANDING COMMITMENT FROM FINANCING & RISK MANAGEMENT TO RESEARCH
enhAnceD eXPeRTise in commoDiTies over 25 years of continued leadership in commodity markets that combines thorough industry knowledge with
technical skills to ensure the delivery of suitable solutions to corporates and investors société générale, with the acquisition of newedge in 2014, now provides agency execution services on major
commodity markets
A comPRehensive offeR full suite of commodities risk management, investment and financing solutions Access to over-the-counter & listed markets, electronic solutions and structured solutions margin finance & inventory finance
PRemium seRvices AnD mARKeT Access Ability to access société générale liquidity through high-quality market-making and gold fixing société Générale is a member of the london bullion Market association (lbMa) and the london Platinum and Palladium
Market (lPPM) Pure Agency execution capabilities on most commodity listed products, futures, options high-quality full client service from pre-trade to post-trade, with voice / high touch and e-commerce channels leading commodity Research with fundamental and technical analysis
société Générale dates back to 1864 Group net income : eUR 0.93 bn1 Continuous presence in commodities since 1979
76 Countries1
154,000 employees & 118 nationalities1 32 million customers1
(1) As of 31/12/2013
(2) As of 30/09/2014
GMFs oCTobeR 2014
armelle.arghiropoulos
soCieTe GeneRale commiTTeD To PRecious meTAls
A WoRlDWiDe seRvice sG CIB’s teams in Paris, london, new york, and singapore enable: Producers to hedge future production and help finance their operations Central banks to enhance returns on the management of their gold reserves Refiners and end-users to hedge their metal risks investors to make the most of market opportunities and broaden their range of risk
management products
A WiDe heDging PRoDucT RAnge on mAJoR unDeRlyings sG Cib provides on gold, silver, Platinum and palladium: spot quotes Pricing on gold fixing standard forwards (swap rates)
and outright forward prices deposit rates
mining & commoDiTy finAncing Through experienced bankers and technical personnel skilled in geology and mining engineering, société Générale provides advisory services and financing for: Mining companies backed by mining deposits and resulting cash flows through Greenfield and
brownfield project finance as well as through unsecured finance listed mining companies at the feasibility stage of their project through principal finance Metals & minerals producers, through structured commodity finance, showing our commitment to
provide financing solutions from project construction to off-take and working capital needs Metals traders through corporate commodity finance to provide financing for working capital needs
and also trade finance to manage their payment risk.
Access elecTRonic eXecuTion foR golD, silveR, PAllADium AnD PlATinium, All in A cuBe
youR conTAcTs
#1 overall dealer #1 overall Research #8 Precious metals Dealer (société Générale) #6 Precious metals Broker (newedge)
commodity Derivatives house of the year (société Générale)
RisK mAnAgemenT
london [email protected] +44 207 762 5154
Paris [email protected] +33 1 42 13 35 78
new-york [email protected] +1 212 278 5661
Asia-Pac [email protected] +65 6326 7909
finAncing
federico TuRegAno Global Head Natural Resources & Energy Financing [email protected] +33 1 57 29 11 28
GMFs oCTobeR 2014
iMPoRTanT inFoRMaTion: societe Generale is a credit institution and an investment services provider authorized and regulated by the French autorité de Contrôle Prudentiel (the French Prudential Control authority) and the autorité des Marchés Financiers. The contents of this document are given for purely indicative purposes and have no contractual value. This document is of a commercial and not of a regulatory nature. This document does not constitute an offer from societe Generale to buy or sell any security or financial instrument, product or services. not all products and services offered by societe Generale are available in all jurisdictions. Prior to investing in a product, investors should seek independent financial, tax, accounting and legal advice. sG does not assume and expressly disclaims any responsibility or liability for any consequences, financial or otherwise, arising from this communication or from any reliance on it. Commodities prices are subject, among other factors, to the supply and demand of the relevant commodity and can fluctuate rapidly as these factors change. Commodities prices fluctuate in a greater proportion if the relevant physical commodity’s liquidity is limited. This communication is not intended for or directed at retail clients. it is for professional clients only. Please contact your local office for any further information. This document is issued in the U.k. by the london branch of societe Generale. ociete Generale is a French credit institution (bank) authorised by the autorité de Contrôle Prudentiel et de Résolution (the French Prudential Control and Resolution authority)and the Prudential Regulation authority and subject to limited regulation by the Financial Conduct authority and Prudential Regulation authority. details about the extent of our authorisation and regulation by the Prudential Regulation authority, and regulation by the Financial Conduct authority are available from us on request. Please visit http://swapdisclosure.sgcib.com for important information with respect to derivative products. “newedge” refers to newedge Group sa and all of its worldwide branches and subsidiaries. newedge Group sa and its branches are lead regulated by the autorité de Contrôle Prudentiel et de Résolution. newedge Group sa is also regulated by the autorité des Marchés Financiers in France. newedge Uk Financial limited is authorized and regulated by the Financial Conduct authority (FCa). newedge Group (Zurich and dubai branches) and newedge Uk Financial limited do not deal with, or for, Retail Clients (as defined under MiFid, FCa rules and dubai Financial services authority (dFsa)). if this material is distributed by newedge Group dubai branch it is intended for Professional Clients only (as defined by the dFsa) and no other Person should act on it. only newedge Usa, llC is a member of FinRa and siPC (siPC only pertains to securities-related transactions and positions). only newedge Canada inc. is a member of the Canadian investor Protection Fund. newedge Uk Financial limited and newedge Usa, llC are swap dealers registered with the CFTC and nFa. not all products or services are available from all newedge organizations or personnel. if necessary, please consult our local office for details.“
soCieTe GeneRale Global bankinG and inVesToR solUTions
sG hoUse – 41 ToWeR hill – london eC3n 4sG – UniTed kinGdoM Website: www.sgcib.com – Tel: +44 (0)20 7676 6000
Forward rate agreements for swap rates, lease rates and metal interest rate swaps
Vanilla and exotic options (asian-style options (options on average) and barrier options)
Fixed/floating metal rate swaps
Best overall commodity finance Bank
Best metals finance Bank (société Générale)
July 2015
armelle.arghiropoulos
soCieTe GeneRale commiTTeD To PRecious meTAls
a PaRTneR you cAn Rely on WiTh a WoRldWide seRvice
A2 Moody’s2 A standard & Poor’s2 A Fitch2
commoDiTies: A LONGSTANDING COMMITMENT FROM FINANCING & RISK MANAGEMENT TO RESEARCH
enhAnceD eXPeRTise in commoDiTies over 25 years of continued leadership in commodity markets that combines thorough industry knowledge with
technical skills to ensure the delivery of suitable solutions to corporates and investors société générale, with the acquisition of newedge in 2014, now provides agency execution services on major
commodity markets
A comPRehensive offeR full suite of commodities risk management, investment and financing solutions Access to over-the-counter & listed markets, electronic solutions and structured solutions margin finance & inventory finance
PRemium seRvices AnD mARKeT Access Ability to access société générale liquidity through high-quality market-making and gold fixing société Générale is a member of the london bullion Market association (lbMa) and the london Platinum and Palladium
Market (lPPM) Pure Agency execution capabilities on most commodity listed products, futures, options high-quality full client service from pre-trade to post-trade, with voice / high touch and e-commerce channels leading commodity Research with fundamental and technical analysis
société Générale dates back to 1864 Group net income : eUR 0.93 bn1 Continuous presence in commodities since 1979
76 Countries1
154,000 employees & 118 nationalities1 32 million customers1
(1) As of 31/12/2013
(2) As of 30/09/2014
GMFs oCTobeR 2014
armelle.arghiropoulos
soCieTe GeneRale commiTTeD To PRecious meTAls
A WoRlDWiDe seRvice sG CIB’s teams in Paris, london, new york, and singapore enable: Producers to hedge future production and help finance their operations Central banks to enhance returns on the management of their gold reserves Refiners and end-users to hedge their metal risks investors to make the most of market opportunities and broaden their range of risk
management products
A WiDe heDging PRoDucT RAnge on mAJoR unDeRlyings sG Cib provides on gold, silver, Platinum and palladium: spot quotes Pricing on gold fixing standard forwards (swap rates)
and outright forward prices deposit rates
mining & commoDiTy finAncing Through experienced bankers and technical personnel skilled in geology and mining engineering, société Générale provides advisory services and financing for: Mining companies backed by mining deposits and resulting cash flows through Greenfield and
brownfield project finance as well as through unsecured finance listed mining companies at the feasibility stage of their project through principal finance Metals & minerals producers, through structured commodity finance, showing our commitment to
provide financing solutions from project construction to off-take and working capital needs Metals traders through corporate commodity finance to provide financing for working capital needs
and also trade finance to manage their payment risk.
Access elecTRonic eXecuTion foR golD, silveR, PAllADium AnD PlATinium, All in A cuBe
youR conTAcTs
#1 overall dealer #1 overall Research #8 Precious metals Dealer (société Générale) #6 Precious metals Broker (newedge)
commodity Derivatives house of the year (société Générale)
RisK mAnAgemenT
london [email protected] +44 207 762 5154
Paris [email protected] +33 1 42 13 35 78
new-york [email protected] +1 212 278 5661
Asia-Pac [email protected] +65 6326 7909
finAncing
federico TuRegAno Global Head Natural Resources & Energy Financing [email protected] +33 1 57 29 11 28
GMFs oCTobeR 2014
iMPoRTanT inFoRMaTion: societe Generale is a credit institution and an investment services provider authorized and regulated by the French autorité de Contrôle Prudentiel (the French Prudential Control authority) and the autorité des Marchés Financiers. The contents of this document are given for purely indicative purposes and have no contractual value. This document is of a commercial and not of a regulatory nature. This document does not constitute an offer from societe Generale to buy or sell any security or financial instrument, product or services. not all products and services offered by societe Generale are available in all jurisdictions. Prior to investing in a product, investors should seek independent financial, tax, accounting and legal advice. sG does not assume and expressly disclaims any responsibility or liability for any consequences, financial or otherwise, arising from this communication or from any reliance on it. Commodities prices are subject, among other factors, to the supply and demand of the relevant commodity and can fluctuate rapidly as these factors change. Commodities prices fluctuate in a greater proportion if the relevant physical commodity’s liquidity is limited. This communication is not intended for or directed at retail clients. it is for professional clients only. Please contact your local office for any further information. This document is issued in the U.k. by the london branch of societe Generale. ociete Generale is a French credit institution (bank) authorised by the autorité de Contrôle Prudentiel et de Résolution (the French Prudential Control and Resolution authority)and the Prudential Regulation authority and subject to limited regulation by the Financial Conduct authority and Prudential Regulation authority. details about the extent of our authorisation and regulation by the Prudential Regulation authority, and regulation by the Financial Conduct authority are available from us on request. Please visit http://swapdisclosure.sgcib.com for important information with respect to derivative products. “newedge” refers to newedge Group sa and all of its worldwide branches and subsidiaries. newedge Group sa and its branches are lead regulated by the autorité de Contrôle Prudentiel et de Résolution. newedge Group sa is also regulated by the autorité des Marchés Financiers in France. newedge Uk Financial limited is authorized and regulated by the Financial Conduct authority (FCa). newedge Group (Zurich and dubai branches) and newedge Uk Financial limited do not deal with, or for, Retail Clients (as defined under MiFid, FCa rules and dubai Financial services authority (dFsa)). if this material is distributed by newedge Group dubai branch it is intended for Professional Clients only (as defined by the dFsa) and no other Person should act on it. only newedge Usa, llC is a member of FinRa and siPC (siPC only pertains to securities-related transactions and positions). only newedge Canada inc. is a member of the Canadian investor Protection Fund. newedge Uk Financial limited and newedge Usa, llC are swap dealers registered with the CFTC and nFa. not all products or services are available from all newedge organizations or personnel. if necessary, please consult our local office for details.“
soCieTe GeneRale Global bankinG and inVesToR solUTions
sG hoUse – 41 ToWeR hill – london eC3n 4sG – UniTed kinGdoM Website: www.sgcib.com – Tel: +44 (0)20 7676 6000
Forward rate agreements for swap rates, lease rates and metal interest rate swaps
Vanilla and exotic options (asian-style options (options on average) and barrier options)
Fixed/floating metal rate swaps
Best overall commodity finance Bank
Best metals finance Bank (société Générale)
July 2015
Table oF ConTenTs
key Points 5
introduction 5
Market Commentary 6
Company activity 7
Focus box: What does the Volatility smile Mean to the Gold Market? 9
Composition & sensitivity of the Global hedge book 10
outlook 11
appendix: Producer hedge books 12
Technical annex 13
Glossary 14
© Thomson ReuTeRs July 2015
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5
Q1 2015
key PoinTs ■ The global producer gold hedge book contracted
by 0.08 Moz (2.6 t) during the first quarter of 2015. ■ This return of activity to the demand side of the
market came after 1.45 Moz (45 t) of net hedging in the last quarter of 2014.
■ The volume of the global producer hedge book stood at 6.21 Moz (193 t) at the end of Q1 2015.
■ During the first quarter, 29 companies were net de-hedgers, with 16 companies adding to their delta-adjusted hedge positions.
■ The marked-to-market value of the aggregate producer hedge book fell by only $5 million during the quarter, to $295 million.
■ The largest de-hedger was Polyus Gold, through deliveries against the large hedge position entered into last year.
■ new hedging was modest in scale, and often consisted of producers adding to existing forward sales postions.
■ Since the end of the first quarter, relatively little new hedging has been announced. We expect this trend of small-scale hedging, often in relation to project financing, together with expansions of existing programs, to persist through 2015.
inTRodUCTionThe first quarter of 2015 saw the market return to net de-hedging, with the producer hedge book reducing in size by 0.08 Moz (2.6 t), in delta-adjusted terms. This follows a year of net hedging in 2014, when hedging contributed 3.33 Moz (103 t) to gold supply, largely on account of two large hedges by Polyus Gold and Fresnillo, executed during Q2 2014 and Q4 2014 respectively. During the first quarter of 2015, scheduled delivery into its hedge position made Polyus the largest de-hedger for the period,
with an overall reduction of 0.16 Moz (4.9 t) to its delta-adjusted hedge book. a further 28 companies reduced their hedge positions during the period, including northern star Resources, Petropavlovsk, oceanaGold and Fresnillo.
new hedging was relatively modest in scale during the first quarter, with the largest individual hedge undertaken by saracen Mineral holdings, which hedged 0.12 Moz (3.8 t) in connection with the decision to re-start the Thunderbox mine, currently on care & maintenance. Norton Goldfields also entered into additional forward sales, while new hedging was undertaken by Minera Frisco and Ramelius Resources. a total of 16 companies saw their delta-adjusted hedge positions increase over the period, though it should be noted that in some cases this occurred passively, through increasing delta against existing positions.
At the end of the first quarter, the global producer hedge book stood at 6.21 Moz (193 t), of which 3.34 Moz (104 t) was forward sales, 1.44 Moz (45 t) was vanilla options, and 1.43 Moz (44 t) was the barrier options held by Polyus. This represents a 4% quarter-on-quarter gain in the forward contract component of the hedge book, while, in delta-adjusted terms, options decreased by 7%.
New hedging activity since the end of the first quarter has been subdued, with confirmations of previously-announced hedging plans coming from Roxgold and banro Corp. We expect to see further modestly-sized new hedges, often in connection with project financing arrangements, as well as extensions to existing hedging programs. Furthermore, we consider it possible that 2015 may see one or more largenew hedges. Taking these factors into account, we expect to see net hedging prevail again during 2015, providing approximately 1.93 Moz (60 t) of additional supply to the market.
CoMPosiTion oF The delTa-adJUsTed Global hedGe book
change (Moz) 14.q4 15.q1 q-o-qForwards & Gold loans 3.22 3.34 4%options 3.07 2.87 -7%Total 6.29 6.21 -1%note: Totals may not add due to independent rounding. numbers are provisional and may be revised. some company’s positions are not reported on a quarterly basis and in these cases we have made estimates.source: GFMs, Thomson Reuters
eVolUTion oF The Global hedGe book
0
2
4
6
8
10
15.Q114.Q113.Q112.Q111.Q1
Moz
Source: GFMS, Thomson Reuters
Forwards
Vanilla Options
Barrier Options
6
Q1 2015
MaRkeT CoMMenTaRyover the month of January gold rebounded amid renewed fears of a possible Greek exit from the euro zone and markets reacted sharply to the swiss national bank’s surprise announcement on 15th January to discontinue the swiss franc’s cap against the euro at a rate of 1.20. The rally took gold prices from $1,206/oz at end december to a five month high of $1,295.75/oz on 22nd January. over that period, investors had begun to price in a victory of the left wing syriza party in Greece and, following the Greek election, the five-year Greek Cds spread rose to a 3-year high. The focus then turned to eCb’s announcement of a €1Tr bond buying program, which led to further strength in the Us dollar to multi-year highs and eased safe-haven buying of gold. The eCb’s stimulus plan coupled
with the expectation of higher Us interest rates marked a turning point for gold in January.
in the following days, fears of a Greek-exit continued to spread across europe, providing some support for gold. however, a strong sell-off on 29th January fueled by hawkish comments on the possibility of an early rate hike by the Federal Reserve caused gold to drop by nearly $20/oz.
Gold had failed to break below $1,260/oz, an important support level, but on 6th February, gold registered its second largest drop after stronger than expected Us non-farm payroll data raised expectations that the Federal Reserve may increase interest rates in June. The drop brought gold prices to $1,241/oz and managed to break below the 200-day moving average for the first time since 2nd september, 2014. The bearish signal marked the beginning of a downward trend channel characterized by low volatility and investor uncertainty. Gold continued to trade lower as the market grew optimistic over a positive resolution in Greece following news Greek banks would continue to have access to emergency funding and, most importantly, a four-month extension of the eU/iMF bailout program. The lack of investor interest was felt throughout February, as trading volumes in CoMeX gold futures fell 30 percent short of monthly average turnover.
between 27th February and 5th March, gold traded range-bound around $1,210/oz amid mixed Us macroeconomic data. but on 6th March, after failing to break above the 100-day moving average, prices fell by $26.25/oz to $1,175.75/oz. The sell-off was fueled by stronger than expected Us non-farm payroll data, which caused speculation over an early rate hike to increase once again. by mid-March,
Gold eTF holdinGs Gold PRiCe
PRiCes (QUaRTeRly aVeRaGe)
14.q4 15.q1 changeUs$/oz 1,201.40 1,218.45 1.4%Us$/oz 12-month rolling 1,266.40 1,247.68 -1.5%JPy/g 4,374 4,666 6.7%ChF/kg 37,063 37,291 0.6%ZaR/kg 432,313 458,233 6.0%GbP/oz 756.11 801.24 6.0%eUR/kg 30,765 34,421 11.9%aUd/oz 1,394.54 1,543.32 10.7%Cad/oz 1,359.29 1,500.94 10.4%Cny/g 237.65 244.21 2.8%TRy/g 87.20 95.50 9.5%RUb/oz 55,027 76,494 39.0%kRW/g 41,783 43,057 3.0%idR/g 471,926 499,245 5.8%Vnd/kg 822,330,598 834,136,965 1.4%inR/10g 23,864 24,385 2.2%source: Thomson Reuters
1,100
1,175
1,250
1,325
1,400
01-Jul-1501-Apr-1502-Jan-1501-Oct-1401-Jul-1403-Apr-14
US
$/oz
Source: Thomson Reuters
Min: $1,142.00/oz (p.m. fix)
Max: $1,340.25/oz (p.m. fix)
40
45
50
55
60
Jul-15Apr-15Jan-15Oct-14Jul-14Apr-14Jan-14Source: GFMS, Thomson Reuters
50
57
64
71
78
85
Moz
Value
US
$bn
7
Q1 2015
the Us dollar traded near an 11-year high, backed by a robust labour market, yet the lack of growth in the housing market began to suggest the Fed would reassess their stimulus plan. shortly after, dovish comments from the Federal Reserve on the outlook of the economy caused gold to jump from $1,147.25 to $1,203.15 on 26th March. yet, gold prices would come under pressure again after gains seen in the oil market following air strikes in yemen by saudi arabia and its arabian Gulf allies, were not sustained. Gold closed the month of March at $1,187/oz.
After a brief recovery during the first week of April, gold failed to break above $1,220/oz as the Fed hinted of a June rate hike. speculation rose, but after a dramatic drop in volume turnover gold came under pressure causing it to trade range bound over the coming weeks. The 100-day moving average, at $1,210/oz, proved to be an important level until 13th May, when nearly after four months, gold broke above. yet, the market didn’t pay much attention to this bullish signal after the Us dollar extended gains following comments by the eCb’s about accelerating its bond buying program. as a result, 10-year Us Treasury yields rose and hit a one- month high on 8th June.
nevertheless, the sell-off was short lived after fears over a Greek debt default provided gold a boost into mid-June. As the five-year Greek CDS spreads approached a two month high, gold climbed to $1,203.40 on 19th June before a continued outflow from bullion-backed funds capped further gains. in the following days, gold retraced as a looming Us interest rate hike took centre stage. Gold closed the month of June at $1,171/oz.
CoMPany aCTiViTyThe first quarter of 2015 saw a return to net de-hedging, as scheduled deliveries into forward contracts and maturation of options outweighed the limited quantity of new hedging undertaken. in delta-adjusted terms, the global producer hedge book contracted by 2.6 t (0.08 Moz) in Q1 2015, a reduction of 1% on the hedge book volume at the end of 2014.
of the 29 companies that experienced net de-hedging during Q1 2015, the most significant was once again Polyus Gold, which saw its delta-adjusted hedge book decrease by 5 t (0.16 Moz), on a combination of forward sale deliveries and maturation of options. Polyus accounted for 25% of the delta-adjusted gross de-hedging during the first quarter. northern star Resources was responsible for a further 10% of the gross reduction, delivering into 2.0 t (0.07 Moz) of forward sales contracts. Petropavlovsk reduced its hedge book by a similar amount during Q1 2015, on a combination of deliveries into forward sales contracts and option expiries totalling 1.9 t (0.06 Moz).
The decision by Fresnillo to hedge production from the newly-acquired remaining 44% stake in the Penmont JV was one of the major hedging stories from the final quarter of 2014. The US dollar-denominated collar structures entered into began maturing in January 2015, and as a consequence Fresnillo was a net de-hedger during Q1 2015, with a 1.5 t (0.05 Moz) reduction in its delta-adjusted hedge book volume. oceanaGold, having expanded its hedging program in october 2014, were net de-hedgers during the first quarter of 2015, with a decrease of 1.6 t (0.05 Moz) in delta-adjusted terms.
independence Group and Torex Gold each ran-down their hedge books, respectively comprised of zero-cost collars and forward contracts, by approximately 1.1 t (0.04 Moz) during the first quarter of 2015. a further 22 companies accounted for the remaining 28% of gross de-hedging for the period.
a total of 16 companies added to their hedge positions during Q1 2015, with saracen Mineral holdings seeing the largest increase, of 3.8 t (0.12 Moz), or 23% of the gross hedging total. saracen added to its existing forward sales position
sPeCUlaTiVe neT PosiTions in CoMeX FUTURes
0
50
100
150
200
MayMarJanNovSepJulMayMarJan-14Source: CFTC
Comex settlem
ent price (US$/oz)
1,000
1,100
1,200
1,300
1,400N
et p
ositi
ons
(con
trac
ts, t
hous
ands
)
Gold Price
8
Q1 2015
by selling an additional 4.4 t (0.14 Moz) forward, at an average price of a$1,520/oz, and with delivery scheduled over the period between september 2016 and March 2019. This new hedge was undertaken in conjunction with the decision to re-develop the Thunderbox mine. stage 1 of the development of this asset, currently on care-and-maintenance, is planned as an open pit, producing 19 t (0.6 Moz) over an initial 4.5 year mine life. norton Gold Fields also expanded an existing forward sales program, with three new tranches, totalling 2.4 t (0.08 Moz) announced during January and February 2015.
Minera Frisco undertook new hedging during the period, with 2.1 t (0.07 Moz) of gold swaps entered into at an average price of $1,290/oz, for delivery during 2015. This represents 45% of the estimated total gold production for the company during this year. Ramelius Resources entered into 1.5 t (0.05 Moz) of new forward sales during Q1, at an average price of a$1,582/oz, which represents approximately 40% of forecast production from Mount Magnet over the next two years. Meanwhile, the 1.9 t (0.06 Moz) gain in the outstanding hedge book of sumitomo Metal Mining comes from a calculated increase in the delta hedging against its hedge book, which in nominal terms is estimated to have decreased as options matured.
a further 11 companies also increased their delta-adjusted hedge position during the quarter, including banro Corp. which added to its small number of forward sales that were outstanding at the end of 2014 with additional forward sales, totalling 0.7 t (0.02 Moz) for delivery over three years. in addition, the company wrote 0.3 t (0.01 Moz) of new call options.
The end-quarter CoMeX settlement price, used to calculate an estimate of the marked-to-market value
of the aggregate global gold hedge book, barely changed quarter-on-quarter, falling by only $0.80/oz. Combined with the relatively small changes in the composition of the producer hedge book during the first quarter, this resulted in an unrealised net asset value of $295 million at the end of March, a decrease of only $5 million since the end of 2014.
Global hedGe book MaRked-To-MaRkeT
(delta-adjusted, spot basis) % of gross: change company hedging (koz)saracen Mineral holdings 22% 122.7Minera Frisco 12% 68.0sumitomo Metal Mining 11% 60.1 De-hedging (koz)Polyus Gold international ltd. 25% -158.7northern star Resources 10% -65.1Petropavlovsk plc. 10% -60.7note: 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. 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 15.Q1
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
15.Q114.Q113.Q112.Q111.Q110.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
-1,800
-1,700
-1,600
-1,500
-1,400
-1,300
-1,200
-1,100
-1,000
-900
Gold Price (end-period,inverted axis)
Marked-to-Market
Source: GFMS, Thomson Reuters
CoRPoRaTe hedGe books (by # oF ConTRaCTs)
Source: GFMS, Thomson Reuters
Polyus Gold International
Fresnillo plc
Sumitomo Metal Mining
OceanaGold
Penoles
Evolution Mining
Saracen Mineral Holdings
Regis Resources
B2 Gold Corp
Carpathian Gold
Others
35%
23%
4%
4%
3%
2%
3%
2%
2%
2%
19%
9
Q1 2015
WhAT Does The volATiliTy smile meAn To The golD mARKeT?
over the last six months, the 22-day realised volatility has seen a decrease from nearly 20% at the beginning of January to almost 13% by end-June. The drop has been more pronounced for gold denominated in australian dollars, which fell by nearly 10% during the same period. although volatility recovered from a four month-low in april after speculation rose over the prospects of a Fed rate hike, concerns around the health of the global economy continued to dampen further upticks. as a result, the implied volatility surface, derived from an observed option price for different maturities and strikes, fell overall and caused the volatility skew to shift in the process.
The skew, commonly referred to as the volatility smile, is subject to market forces that exert control over its shape. The overall drop in volatility seen in the gold market can be attributed to the narrow trading range since mid-March. over this period, gold failed to break important technical levels, thus suppressing an uptick in volatility. as with any other instrument, negative price movements tend to cause volatility to spike; a reaction which is proven to be milder for positive jumps. such risk leads investors, who are predominantly net long, to protect their exposure to the downside and ultimately drive higher the premium paid for put options.
over 2014, gold producers opted to use more options contracts than forward contracts to hedge their exposure. The change could be partially attributed to the apparent discount of option contracts present during periods of low volatility.
The interplay between price movement and option premium talks to market sentiment with respect to the underlying instrument, and can thus be used to further understand investor expectation. When volatility is expected to increase, the symmetry of the volatility smile changes, displaying either a reverse or forward skew. if investor expectations are realised the smile will shift up the volatility scale. Conversely, if implied volatility remains static or falls, this would suggest that market conditions failed to evolve in line with consensus. as investors subsequently unwind their downside protection the gradient of the skew, or risk reversal, flattens. Charted right, we look at the evolution of the three-month volatility smile, a tenor that is widely referenced and has shown pronounced evolution over the past six months.
in mid-January the smile exhibited a broadly symmetrical distribution at a high level of volatility, indicating strong demand for options and investors taking upside and downside bets in roughly equal measure. a reverse skew had developed by mid-February (which has been sustained in the market for the past five months) suggesting that the gold market had moved to protect against downside risk, in so doing bidding up the price of puts relative to calls. The risk reversal became more extreme in March as the market continued to add bets (an indication of a net purchase of puts) of further falls in the market.
The drop we have seen in gold volatility over the last few months reflects the narrow range gold has traded since mid-March. With the passage of time, we have seen
investors slowly price-in a milder downward move for volatility, causing the relative cost of buying options to fall and arguably gain appeal to some over forward sales contracts.
Ultimately, the shape of the smile informs us of the extent to which investors are managing price risk and the direction of the bets being made using options. it should be borne in mind that the investment community en masse will not always make the right bets and it will be interesting to see whether an uptick in volatility will be preceded by higher out-the-money put premiums, or vice versa. only time will tell.
ThRee MonTh VolaTiliTy sMile
% V
olat
ility
Source: Thomson Reuters Eikon
13
14
15
16
17
18
19
20
21
22
17-Jun-15
18-May-15
17-Apr-15
17-Mar-15
17-Feb-15
16-Jan-15
+\- 45 delta
10
Q1 2015
CoMPosiTion & sensiTiViTy oF The Global hedGe bookThe producer hedge book at the end of March stood at a delta-adjusted 6.21 Moz (193 t), of which 1.62 Moz (51 t) and 0.91 Moz (28 t) were attributable to Polyus and Fresnillo, respectively. activity in the first quarter continued the rebalancing of the hedge book between forward and option contracts.
as witnessed over 2014, gold producers opted to use more options contracts than forward contracts to hedge their exposure. at the end of 2013, almost 60% of all hedge contracts in place (on a nominal basis) were forward sales, with the balance comprising option positions, mostly arranged as collar structures. at end-2014, forwards had fallen to represent just over one-quarter of the total book;
most new gold hedging last year was undertaken using option structures.
This activity left number of vanilla option and forward contracts to stand at almost 40% and 27% of the total hedge book at end-March, respectively.
With the majority of the option contracts that make up the book structured as collars, the number of ounces of production covered by the entire hedge
book is considerably smaller than what is suggested by the nominal 12.56 Moz (390 t) total. We estimate that approximately 6.2 Moz (193 t) of future production was covered over the period end-March 2015 to 2019.
at end-March, the producer hedge book remained more sensitive to a gold price decrease, with the average strike price of bought puts remaining within close range of the spot price. however, the average strike of sold calls experienced a greater price change, dropping by $48/oz to $1,441/ oz. as a result, the average delta of the sold call at end-March rose from 0.06 on last quarter, to 0.11; while the delta of the bought put component stood at 0.30. The table, on the left, indicates that had gold prices been $200/oz lower at quarter- end, the volume of delta hedging would have been 0.40 Moz (12 t) higher at end-Q1, compared with only a 0.20 Moz (6.2 t) shift in the event that prices had closed the quarter $200/oz higher.
Therefore, the option book at present continues to act as a more effective hedge against downside price risk,
noMinal hedGe book CoMPosiTion
sensiTiViTy oF The oPTions book 15.Q1
ConTRaCT WeiGhTed aVeRaGe sTRike PRiCes(weighted by number of contracts) contract Type Trigger usD AuDbought Puts - $1,099 $1,368sold Calls - $1,441 $1,676Forward sales - $1,335 $1,504knock-in barrier sold Calls $1,683 $1,520 -knock-out barrier bought Puts $923 $1,186 -source: GFMs, Thomson Reuters
Move in Move in Gold Price Volatility (Us$/oz) (%) -200 -150 -100 -50 0 +50 +100 +150 +200+4 6.61 6.51 6.45 6.40 6.37 6.37 6.41 6.47 6.55+3 6.61 6.51 6.44 6.37 6.33 6.33 6.37 6.43 6.52+2 6.61 6.50 6.42 6.34 6.30 6.29 6.32 6.39 6.49+1 6.61 6.49 6.40 6.31 6.25 6.24 6.28 6.35 6.450 6.61 6.49 6.38 6.27 6.21 6.19 6.23 6.31 6.41-1 6.62 6.49 6.35 6.24 6.16 6.14 6.17 6.26 6.37-2 6.62 6.48 6.33 6.19 6.10 6.07 6.11 6.20 6.33-3 6.63 6.48 6.30 6.14 6.04 6.01 6.05 6.14 6.28-4 6.65 6.47 6.27 6.09 5.97 5.93 5.97 6.08 6.23source: GFMs, Thomson Reutersnote: The matrix above shows the sensitivity of the delta-adjusted hedge book at end-15 Q1, under different gold prices and volatilities, assuming all other factors remain equal. The delta-adjusted total hedge book at the end of 15.Q1 was calculated at 6.21 Moz, based on the end-year COMEX settlement price of $1,183.10/oz, the gold p.m. fix quarterly average of $1,218.43./oz, and proprietary société Générale market rates.
Source: GFMS, Thomson Reuters
14.Q4 Nominal Volume: 12.58 Moz (391 t)
15.Q1 Nominal Volume: 12.55 Moz (391 t)
Forwards
Vanilla Puts
Vanilla Calls
Barrier Puts
Barrier Calls
11
Q1 2015
rather than as a cap to the upside. The sensitivity of the producer hedge book, shown above, illustrates the extent to which the option book exposure at end-Q1 would have increased under an upward or downward shift in the gold price with all other market factors remaining constant.
oUTlookThe delivery schedule at the end of March 2015 indicated that approximately 67 t (2.2 Moz) of de-hedging is expected during the last nine months of 2015, the majority of which consists of deliveries into forward contracts, with the balance split between expiry of vanilla options and Polyus’ barrier options. Given that net de-hedging was the outcome for the first quarter of the year, with a gross 17 t (0.56 Moz) of delta-adjusted hedging versus 20 t (0.63 Moz) of de-hedging, the pace of new hedging will have to pick up somewhat throughout the rest of this year in order for net hedging to prevail in 2015.
however, there has been little evidence of any significant uptick in hedging activity since the end of the first quarter. Project finance-related hedging was announced in June by doray Minerals, which terminated a Metals Purchase agreement with sandstorm Gold, which it achieved through refinancing its existing Andy Well Project Finance facility. As part of this refinancing agreement, it is required to enter into an, as yet unspecified, quantity of additional gold hedging contracts. Roxgold announced the signing of a $75 million project finance facility for the development of its Yaramoko project in burkina Faso. This will include a gold hedging program covering 2.0 t (65 koz) of gold, equivalent to approximately 8.5% of the current
reserve, over the six-year life of the loan, with first production expected in Q2 2016. as expected, during the second quarter banro Corp. closed the balance of its $90 million financing, which included a second tranche of gold forward sales relating to the Twangiza mine. each tranche involves delivery of 618 oz per month for a period of three years.
We expect the remainder of 2015 to involve further announcements of modest hedges, of a similar scale to those described above, particularly in relation to project financing. If hedging activity remains at the level seen throughout the first half of this year, net de-hedging may be the eventual outcome for the year as new activity will scarcely balance the scheduled unwinding of existing hedge contracts. however, it would take only one or two new hedges of the magnitude undertaken by Polyus or Fresnillo during 2014 to tip the balance firmly back into net hedging, and we take the view that 2015 is likely to see at least one large new hedge from a gold producer. Consequently, we anticipate net hedging of approximately 1.93 Moz (60 t) during 2015.
15.Q1 deliVeRy PRoFileend-15.Q1 delTa-adJUsTed Global oPTions book sensiTiViTy
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
19.Q418.Q417.Q416.Q415.Q4
Moz
Source: GFMS, Thomson Reuters
Forwards
Vanilla Options
Non-Vanilla options
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Moz
Source: GFMS, Thomson Reuters
Barrier Calls
Vanilla Calls
1,1841,084984 1,284 1,384US$/oz
Barrier Puts
Vanilla Puts
12
Q1 2015
PRodUCeR hedGe books 15.Q1
(koz) net nominal Delta-adjusted company Totals forwards options Total options Total Polyus Gold 194 4,260 4,454 1,431 1,624 Fresnillo Plc 0 2,896 2,896 906 906 evolution Mining 327 - 327 - 327 saracen Mineral holdings 308 - 308 - 308 Regis Resources 270 - 270 - 270 Carpathian Gold 205 - 205 - 205 oceanaGold 0 510 510 203 203 b2 Gold Corp 185 82 267 9 194 norton Golfdields 183 - 183 - 183 Torex Gold 170 - 170 - 170 st barbara Mines 144 - 144 - 144 northern star Resources 135 - 135 - 135 boliden 112 - 112 - 112 silver lake Resources 109 - 109 - 109 Penoles 32 343 375 73 104 PanTerra Gold 87 - 87 - 87 detour Gold 85 - 85 - 85 Troy Resources 81 - 81 - 81 Midway Gold Corp 81 - 81 - 81 sumitomo Metal Mining 0 527 527 74 74 Perseus Mining 70 - 70 - 70 Minera Frisco 68 - 68 - 68 Millennium Minerals 65 - 65 - 65 endeavour Mining 56 - 56 - 56 doray Minerals 56 - 56 - 56 Ramelius Resources 47 - 47 - 47 imperial Metals 0 139 139 45 45 independence Group 0 165 165 45 45 Petropavlovsk 18 77 94 26 44 sumatra Copper & Gold 0 126 126 32 32 hochschild Mining 29 - 29 - 29 alkane Resources 28 - 28 - 28 dundee Precious Metals 26 - 26 - 26 banro 24 11 35 1 25 lonmin 24 - 24 - 24 shanta Gold 21 - 21 - 21 endomines 21 - 21 - 21 kingsgate Consolidated 18 - 18 - 18 aurelia Metals ltd 9 26 35 8 17 Thompson Creek 0 43 43 13 13 First Quantum Minerals 13 - 13 - 13 other 44 8 51 1 45 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.
DisclAimeR
Whilst every effort has been made to ensure the accuracy of the information in this document, the content of this document is provided without any guarantees, conditions or warranties as to its accuracy, completeness or reliability. It is not to be construed as a solicitation or an offer to buy or sell precious metal, related products, commodities, securities or related financial instruments. To the extent permitted by law, we, other members of our group of companies and third parties connected to us hereby expressly exclude:
all conditions, warranties and other terms which might otherwise be implied by statute, common law or the law of equity. any liability for any direct, indirect or consequential loss or damage incurred by any person or organisation reading or relying on this document including (without limitation) loss of income or revenue, loss of business, loss of profits or contracts, loss of anticipated savings, loss of goodwill and whether caused by tort (including negligence), breach of contract or otherwise, even if foreseeable.
by continuing to read this document, you agree to all the above terms and conditions in their entirety.
13
Q1 2015
TeChniCal anneXThe GFMs team at Thomson Reuters calculates the delta-adjusted global hedge book from a suite of market data and proprietary tools from Thomson Reuters eikon. each mining company’s individual trades are captured on a quarterly basis.
each option trade is entered with strikes and expiry dates 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.
14
Q1 2015
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 breaches 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.
15
Q1 2015
aboUT The GFMs TeaMwww.thomsonreuters.com http://commoditiesupdates.thomsonreuters.com
The GFMs team at Thomson Reuters is recognised as one of the world’s 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.
