AngloGold Ashanti eliminates gold hedge book

Section:

By Robb M. Stewart
The Wall Street Journal
Thursday, October 7, 2010

http://online.wsj.com/article/SB1000142405274870469630457553785141584507...

JOHANNESBURG, South Africa -- AngloGold Ashanti Ltd. has taken a $2.6 billion bet on the rising price of the precious metal, saying it has eliminated the last of what in recent years have been disadvantageous contracts to sell gold at set prices.

By closing its hedge book, the Johannesburg-based company will now sell gold at market prices, which it said it expects will enhance cash flow and profit margins.

Already, the decision has begun to pay off for AngloGold, one of the last major gold producers globally to hedge its output, essentially foregoing gains in prices for the security of knowing it will be able to set its output at a given level. Hedging was a popular practice in the 1990s as gold prices floundered and some central banks sold parts of their reserves.

... Dispatch continues below ...



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The spot price of the metal surged to a new record Thursday.

"I am pleased I will never have to answer another question about the hedge book again," said Chief Executive Mark Cutifani, who made ridding the company of the hedges a priority when he took the role in September 2007.

Anglogold paid an average of $1,300 a troy ounce to dissolve the remaining hedges, which Mr. Cutifani told reporters during a conference call was slightly higher than AngloGold had expected to pay. Global events, including the continual printing of money "hand over fist" by the U.S. and other countries and analyst predictions that gold could hit $1,500 per ounce, convinced the company to push ahead, he said.

The spot price as of Thursday was about $1,360 per ounce.

"We are already in the money," Mr. Cutifani said.

AngloGold said the closing of the contracts cost it $2.63 billion, which is in addition to $98 million the company paid to cover maturing hedges in the third quarter. Charges against earnings to cover those costs will be taken in the third and fourth quarters of 2010.

The hedge book locked in prices for 11.3 million troy ounces of gold at the beginning of 2008, and has been steadily reduced since then to 3.22 million ounces in June. Mr. Cutifani said the cost of taking out the hedges has been about $6 billion, while the company would have foregone $10 billion if it had done nothing.

"The completion of the hedge book restructure over the last three years has created about $4 billion of value for our shareholders," Mr. Cutifani said.

AngloGold in September raised a gross $1.6 billion in an offering of equity and mandatory convertible bonds to help cover the cost of dissolving the remaining hedges.

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