The Art of Hedging Gold
Shepherd, Bill, Global Finance
GHANA'S ASHANTI GOLDFIELDS IS ONE OF A HANDFUL OF MINERS ABLE TO EXPLOIT DEFLATION BECAUSE OF ITS SAVVY DERIVATIVES DEALS.
The worldwide plunge in commodity prices the past couple of years is wrecking revenues and profits, not to mention balance sheets, at commodity producers from oil companies to miners. Companies clever at hedging their selling prices, though, are in the catbird seat-strong enough to exploit their rivals' weakness by making acquisitions, buying back shares, negotiating attractive loan terms, and the like.
An interesting case study is Ghana's Ashanti Goldfields. The world gold price, as high as $417 an ounce in February 1996, has fallen more than 30%, to around $288, with little prospect of going back up this year. But Ashanti isn't languishing. While many rivals are shutting mines and struggling with debt payments, Ashanti's artful approach to both hedging and managing its liabilities has allowed it to continue to pursue exploration and development across Africa, from Senegal to Tanzania and Ethiopia to Mozambique. Indeed, Ashanti has become the premier sub-Saharan corporation outside South Africa-in any industry.
"They're very sophisticated," says Andrew Stewart, managing director of commodity sales in London for Goldman Sachs, one of Ashanti's main hedging counterparties. "More important, they're very successful."
"Our hedge book currently stands at approximately 7.5 million ounces, says Mark B. Keatley, Ashanti's CFO, "at an average contracted price of $390 per ounce"-a full $100 over the current market. "The value of the book today is about $200 million. Our hedging has raised more than $300 million of cash in the last two calendar years "That's more than half again as much as cash flow from actual production.
In short, Ashanti appears to be evolving into a new kind of company-one in which financial engineering is as important as its basic business. The wheeling and dealing in derivatives isn't classic zaiteku, though, because it isn't in unrelated financial instruments. Production and hedging are inextricably enmeshed: What are in effect short positions in physical gold are covered by what comes out of the mines. Explains Keatley: "We couldn't do this if we didn't have 23 million ounces of proven reserves in the ground:'
Nor is Ashanti unique. Canada's Barrick Gold began pioneering the hedging side of the business in 1988. In the 1990s South Africa's Anglo-American and Australia's Normandy became major gold hedgers, too. Ashanti began dab bling in hedging in 1991 but didn't take the full plunge until 1994, when the company's longtime chief executive, Sam E. Jonah, arranged an initial public offering in London as the first big step in privatizing the company (the Ghanaian government still owns 19.89%).
Realizing he needed to keep his share price up for acquisitions, Jonah brought in Keatley, who cut his eyeteeth in corporate finance at Ford Motor before running project finance in Africa for the International Finance Corporation, the World Bank's private sector financing arm. Keatley, 41, oversees hedging strategy, while actual day-to-day hedging is run in Accra, Ghana's capital, by Mona Caesar-Addo, Ashanti's group treasurer, with a team of five Ghanaians and a Guinean. Formerly a forex trader who ran treasury operations at Eco Bank in Accra, Caesar-Addo, 35, has taken to hedging with a creative passion. "Astute, hard negotiator: She's good," says Stewart. Says Keatley: "She's doing a superb job"
If all this makes Ashanti seem like a bank, the impact on its balance sheet has been remarkable. Thanks to the hedging, Ashanti in recent months was able to prepay $93 million in project financings and buy back 3% of its stock and 10% of some convertible notes at a 20% discount. In the same period, it used the shares, at a higher value, in a $137 million package of convertible securities, loan notes, and cash to buy Canada's Samax Gold, a deal that vastly increased Ashanti's gold resources in Tanzania, where it already held licenses adjacent to Samax's. …