London Times analyzes struggle over Normandy and hedging

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http://biz.yahoo.com/rf/011210/syd226593_1.html

By James Regan

SYDNEY, Dec 10 (Reuters) -- Newmont Mining Corp, which on Monday
lifted its bid for Australia's Normandy Mining Ltd by A$900 million,
is betting that gold prices are poised to rise after years in the
doldrums.

"We think there is a substantial movement in the gold price coming,"
Newmont chief executive officer Wayne Murdy said.

Gold has averaged around US$350 an ounce over the last 10 years,
but these days rarely trades above US$280 an ounce.

Newmont has vowed to dismantle Normandy's hedge book of
nearly 8 million ounces of gold sold forward to 2010 at an average
price of A$585 an ounce, bringing the Australian miner in line with
Newmont's no-hedging policy. Gold currently fetches US$273 an
ounce or about A$525 an ounce.

With Normandy in the Newmont fold, a US$25 an ounce rise in
bullion would increase Newmont's pre-tax cash flow to almost
US$200 million from US$162 million on its own.

"This company will have the strongest EBITDA (earnings before
interest, depreciation and amortisation) than anyone in the industry,
and we will do it based on the spot gold price," Newmont's Murdy
told a media briefing on the raised bid.

Newmont stormed back into the battle for Normandy in New York
on Sunday, winning the support of Normandy's board for its
revised offer. The new offer, which values Normandy at A$4.24 billion
or about A$1.90 per share, is 15 percent higher than a rival bid made
by South African miner AngloGold Ltd .

Newmont's policy differs from AngloGold, which has hedged
about 84 percent of next year's production at an average price of
US$281 an ounce, compared with spot bullion at US$273 an ounce.

Newmont is also offering another US$2.58 billion in shares to buy
Canadian gold investor Franco-Nevada Mining Corp Ltd, which owns
19.9 percent of Normandy.

Franco-Nevada also has thrown its hat in with Newmont and is liable
for US$100 million in break fees if it pulls out.

"We bring together a strong balance sheet and the royalty income
flows that Franco-Nevada contributes, that becomes our natural
hedge. Therefore, we can remain exposed to the gold price,"
Newmont's Murdy said.

Hedging allows a company to guard against falling gold prices
by selling future production at a fixed price, but it can backfire
when bullion prices rise.

A boom in hedging, designed to guarantee fixed selling prices
for future production of gold, has placed mining companies and
other investors in gold at risk if bullion prices rise too much.

The plight of Ashanti Goldfields Ltd. and Cambior Inc., which
were forced to restructure in 1999 after a price surge tipped
their hedge books out of kilter, highlighted the downside risk
to industry hedging.

"Hedging has been the bane of this industry," said Franco-Nevada
president Pierre Lassonde.

He predicted some 1,000 tonnes of gold will be removed from
the world gold pool annually over the next few years as low
interest rates dull the appeal of borrowing gold to install
hedges and mine output declines, Lassonde said.

"The price could easily go up $50" an ounce, Lassonde said.