Last updated: February 17, 2010 9:02 pm

Anglogold cuts hedge book to narrow losses

AngloGold Ashanti, the world’s third-largest gold miner, continued to free itself of its toxic gold hedge book in 2009, a move that helped the company narrow its annual pre-tax loss to R1.17bn ($154m), helped by strong gold prices in the fourth quarter.

Since AngloGold’s 2004 merger with Ashanti Goldfields, the company’s hedge book has obliged it to sell gold at prices significantly lower than a spot price that is now buoyant above $1,000 per ounce. That is just one problem the company faces.

AngloGold’s total cash costs – a measure of the cost of gold production – rose from $444 per ounce in 2008 to $514 in 2009.

The company forecast that figure would rise to $590-$615 this year, as it unveiled its annual results in Johannesburg.

AngloGold’s gold production fell 8 per cent to 4.6m ounces in 2009.

The trend of rising costs amid declining production is common in the South African gold industry, which is forced to dig its mines ever deeper as input costs such as energy and labour rise.

At the same time, the miners are complying with heightened South African mine safety standards, which periodically halted production last year.

Also, the South African rand has remained strong against the dollar, eroding earnings after conversion.

For AngloGold the saving grace is the gold price. That is why Mark Cutifani, AngloGold’s chief executive, has made the winding down of the hedge book his signature policy, paying unfavourable contracts off, so the company can bring forward the time it is fully exposed to the spot price.

The company, which is now entirely independent of London-based Anglo American, slashed its gold hedge book from 6m ounces in December 2008 to 3.9m in 2009. But the negative value of the hedge book on a mark-to-market value was $2.18bn, as the gold price also rose.

“The hedge book is now less than a year’s production and about 5 per cent of [AngloGold’s gold] re-serves,’’ Mr Cutifani said in a statement. “We’ve taken the rump of the hedge out and will continue to look for the right opportunities to increase our exposure to the gold price.”

AngloGold’s pre-tax loss fell from R18.1bn to R1.17bn in 2009, with the previous year’s loss largely reflecting hedge book writedowns.

In spite of ongoing pressures on profitability, AngloGold raised its final dividend to 70 South African cents, taking the total 2009 dividend to 130 cents, a 30 per cent increase from the 2008 total dividend.

Barrick Gold, based in Toronto and the world’s biggest gold miner, has also focused on hedge book elimination. It wound down the last of its commitments during the fourth quarter of 2009, requiring the purchase of about 5m ounces.

The gold price continues to be driven by “safe haven” investment interest. AngloGold noted that gold investment at the end of last year had exceeded gold jewellery demand for the first time since 1980.

AngloGold’s share price fell 0.34 per cent to R29,400 .

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