Where Will The Yellow Brick Road Lead?

The gold price soared to all-time highs in August. Will the rally continue? And what does this mean for miners of the yellow metal?

- David McKay

No commodity in the world needs a health warning quite like gold. Just ask Gold Fields’ chief financial officer, Paul Schmidt, who earlier this year wrote forward sales contracts on a gold price assumption of $1 200 per ounce, and made similar local currency assumptions of some A$1 600/oz and roughly R555 000/kg for Australian and SA production respectively. The hedge book duly locked in a tidy $130m in pre-tax free cash flow.

The problem is that the rand gold price is currently around R740 222/kg. At the time of closing its interim results on 30 June, Gold Fields registered a mark-to-market non-cash loss on its hedge book of $120m.

“Gold Fields currently has about 50% of gold production hedged for 2019 and this morning states that 950 000 ounces of new hedging for 2020 is in place, about 45% of 2020 estimated production, which limits Gold Fields’ upside for the current rally in gold prices,” said JP Morgan in a note following the gold firm’s interim results presentation in mid-August.

“Therefore, we prefer close peer AngloGold, which has minimal hedging in place and has full exposure in the current gold price,” it said.

It is, though, a question of horses for courses.