JOHANNESBURG (miningweekly.com) – Thomson Reuters GFMS and Societe Generale’s global producer hedge book for the second quarter of 2016 expanded by 670 000 oz on a delta-adjusted basis, representing an 8% quarter-on-quarter increase.

As a result, the hedge book stood at 9.5-million ounces at June 30.

Over the second quarter, Australia-based operators accounted for 46% of the gross hedging, with the majority of the net hedging coming from OZ Minerals, which hedged 60% of the recoverable gold contained in stockpiles out to 2021.

Overall, 26 companies saw net increases in their hedge position, while 39 companies reduced the size of their hedge book.

Of the net dehedgers, Polyus Gold saw the largest hedge book reduction as the company exercised 240 000 oz of barrier options and forward sales, followed by Evolution Mining and Zijin Mining.

Turning to the sensitivity of the global hedge book, the average strike of US dollar denominated sold calls rose by $19/oz to $1 395/oz, in tandem with the increase in gold prices since at the end of the first quarter.

During the second quarter, producers appeared more amenable to entering into relatively short-dated option contracts, although some of the new forward sales were over appreciably lengthy tenors, relative to recent hedging.

At the end of June, the delivery schedule for the third quarter amounted to 1.37-million ounces. Following the UK’s decision to leave the European Union, few reports of new hedging surfaced to counter this scheduled dehedging activity during the third quarter.

In July, Harmony Gold announced that it had entered into a two-year forward sales agreement covering 430 000 oz of production at R682 000/kg.

Elsewhere, St Barbara Mines entered into forward sales covering 50 000 oz of production along with lesser volumes by Ramelius Resources and Aurelia Metals.

Based on recent announcements and comments by mining company management, GFMS believes that, to generalise, the gold producer community is starting to develop a more open attitude towards hedging; however, it should be noted that most of the activity announced to date remains modest by historical standards.

“Though the apparent trend to hedge over shortening tenors has reversed across forward sales, the same cannot be said about vanilla options. Should prices fail to break above $1 400/oz in the third quarter, GFMS forecasts modest dehedging as the more likely outcome for the third quarter,” it said in the report.

The delivery schedule at end-June indicated that 1.37-million ounces of dehedging was expected during the third quarter. The forward sales component amounted to 950 000 oz of scheduled deliveries, with a smaller contribution from vanilla and exotic options.

“Although the third quarter has so far seen sparse announcements of new hedging activity, we believe the uncertainty over higher prices this year will elicit gold producers to join the hedging club.

“Should prices fail to break above $1 400/oz in the third quarter, producers may opt to sit on the sidelines while their hedge books naturally unwind. As some producers continue to express their openness to hedging, we consider it probable that subsequent to a third quarter of net dehedging the outcome for the year will be another year of net hedging.

“This could be fuelled by renewed hedging activity likely to follow a break above $1 400/oz in the fourth quarter,” the report stated.