AngloGold Ashanit (AU) announced this morning that it will raise $1.2 billion, which will be used in conjunction with cash on hand plus credit lines, in order to eliminate its gold hedges, thereby indicating that its management obviously sees much higher gold prices ahead.
Recall that Barrick Gold last September at the Denver Gold Show announced a similar move to remove its massive hedges. At the time gold was just below $1000/oz and the Einsteins on Wall Street criticized this decision. CNBC reported that it likely marked the top of the gold market. With gold at $1270, now how does this decision look?
I applaud this move by AU because those hedges were one of the factors which prevented me from investing in the Company. As one of the world’s largest gold producers, AU has an enormous resource base – and therefore substantial leverage to the price of gold as well as the benefits of economies of scale – all of which were severely limited by its large, value-destroying gold hedge.
And I will reiterate the same comment that I made when ABX implemented its move de-hedge. ABX and AU are not creating short term shareholder dilution and spending billions to de-hedge because they think gold has maybe another 10-20% of upside. After all, these hedges were put on a decade ago when gold had been stagnating around $300/oz. Both companies have already suffered the damage incurred by a 400% rise in the price of gold. Make no mistake in your interpretation, this decision to spend the capital needed to remove these hedges is no doubt based on industry-insider conviction that the price of gold will eventually increase by several multiples.
“What we see here is one of the greatest, least loved, and least recognized primary bull markets in history…. This great gold bull market is something that one sees maybe once or twice in a lifetime.”
– Richard Russell, September 2010