Results yesterday from gold miners, Newcrest and Lihir (See below) confirm the rightness of their decisions last year to eliminate the costly drag on earnings and their balance sheets from their extensive hedging protection.
Both companies restructured their hedge books, borrowed a lot of money and have exposed themselves to the ups and downs of the gold price.
And in the past few months, it’s been mostly up, with a big down post balance date.
The reaction of the market to both reports was illuminating.
Even though gold prices were weak overnight, Newcrest shares rose 42 cents to $25 but Lihir shares fell 4 cents to $2.20.
Newcrest reported an 87% rise in 2008 net profit after it closed out its gold hedge book to give itself more exposure to world prices.
Newcrest said its statutory profit for the year to June 30 was $134.2 million from $72 million in the previous year, but the real result was its underlying profit before hedge restructuring which was $493.9 million, more than double the previous year’s $191.2 million.
Higher copper prices helped of course, but the slump since balance date in the price of that commodity won’t help first half earnings for 2009. But that’s the wings and roundabouts of unhedging.
Newcrest said it was ”well positioned for future growth with a strong balance sheet combined with a portfolio of high quality operating and project assets”.
Realised gold prices had jumped 34% on an increase in spot prices and a reduction in sales delivered into hedge contracts, while realised copper prices increased by 32% after hedge positions matured in June 2007.
(Newcrest reported a loss of $8.1 million in the first half after buying gold at near record prices to meet forward sales contracts. The company completed a A$1.7 billion buyback of forward sales contracts in June.)
Newcrest said however that price gains for gold and copper were partially offset by rising costs for fuel and wages.
The company said it continued to face cost pressures at all of its operating sites, with annual site costs 3% above guidance after higher production levels and price increases in key inputs.
Mine production costs increased by $137.4 million to $1.02 billion, with 53% of the increase due to cost increases for diesel fuel, utilities and power and labour.
Newcrest’s flagship Telfer mine in the Pilbara region of Western Australia was affected in June and July by a gas supply disruption after an explosion at Apache Energy Varanus Island processing plant.
The company has estimated that the outage will cost it about $34.3 million as it had to arrange other energy sources.
Newcrest has increased its group reserves by 20% to 40 million ounces of gold and resources by 28% to 70.6 million ounces.
"Group Mineral Resources are estimated at 70.6 million ounces of gold and 9.18 million tonnes of copper.
"This represents a year on year increase for gold of 28% or 15.4 million ounces and increase for copper of 62% or 3.53 million tonnes.
"Group Ore Reserves are estimated at 40.0 million ounces of gold and 4.15 million tonnes of copper.
"This represents a year on year increase for gold of 20% or 6.8 million ounces and increase for copper of 54% or 1.45 million tonnes."
The company declared a final dividend of ten cents per share, up from five cents in the prior corresponding period
Lihir Gold posted a first-half net profit of $36.5 million, bouncing back from $46.5 million loss in the same period a year ago after it closed out its hedge book.
Sales rose 22% to $286.7 million.
The result compares with broking estimates of $37.6 million to $51.2 million.
Lihir said it remains on track to increase production by more than 20% in the current year to a record 850,000 ounces, translating into a significant increase in reported profit.
The first half net profit of $36.5 million, which compares with a loss of $46.5 million in the June half of 2007, and is up 78% on the $20.6 million profit for the six months to December last year.
"The result follows the successful merger with Equigold NL, completed in June, which brings to the LGL group the well established Mt Rawdon gold mine in Queensland, and the Bonikro operation in Ivory Coast.
"Bonikro is now in commissioning, with the first gold pour scheduled for September.
"It is forecast to produce approximately 50-60,000 ounces in the current year, while Mt Rawdon should contribute approximately 50,000 ounces, including 5,100 ounces in the first half.
"In addition to the new Equigold assets, LGL’s second half production will benefit from the start of commercial gold production at Ballarat.
"Ore extraction is set to begin this month with mining of the first stope, and will ramp up over the remainder of the year. Ballarat is expected to produce approximately 40-50,000 ounces in 2008, with the bulk of production in the final quarter.
"The LGL group’s major asset, the 23 million ounce reserve Lihir Island mine, continues to perform well, and is scheduled to produce more than 700,000 ounces this year, following output of 308,000 ounces in the first half.
"The expansion of the process plant to lift output to more than 1 million ounces per year continued to make good progress in the first half, and remains on budget and on schedule for completion in 2011.
"By the end of this year, the LGL group will have four mines in operation, producing a tot
