JOHANNESBURG (miningweekly.com) – The significant jump in the volume of hedging activities during the second quarter of the year was not an indication of a secular shift in producer sentiment to hedge gold production, Societe Generale and Thomson Reuters GFMS said this week.

The duo’s second-quarter Global Gold Hedge Book Analysis showed a delta-adjusted 1.77-million-ounce, or 55 t, rise in the global hedge book volume to 4.68-million ounces (146 t) during the quarter to June.

The increase was attributed to Polyus Gold’s “isolated” large-scale hedging activity, comprising both exotic options and forward sales, in July.

Of the 2.27-million ounces, or 71 t, of fresh delta-hedging during the second quarter, 2.04-million ounces, or 63 t, was attributable to Polyus, which, if excluded, would have resulted in net dehedging, as the delta-hedge against the positions of 25 companies fell by an aggregate 500 000 oz, or 16 t.

The report forecast a “switch back” to dehedging over the next two quarters, moderating the scale of net hedging for 2014 as a whole to around 40 t, or 1.29-million ounces.

“The first half of this year saw the most substantial producer hedging activity in the gold space for several years [owing to] Polyus’ move to hedge revenues against its [emerging] Natalka project,” said Thomson Reuters precious metals mining research manager William Tankard.

“We expect to see modest net dehedging during the second half as producers run down existing positions.”

Polyus had entered the hedge as a means of protecting margins during the early operating stages of its major construction-stage Natalka project, located about 400 km from the seaport of Magadan, in Russia. The project was expected to be completed by 2015.

The conventional shovel-and-truck openpit operation boasted 31.6-million ounces of proven and probable gold reserves and 59.7-million ounces of measured, indicated and inferred gold resources. The mine had the potential to eventually deliver 1.5-million ounces of gold a year.

The latest quarterly analysis of the hedging activities of gold mining companies showed that net delta-hedging by producers, other than Polyus, was “relatively small in scale”, with gold miners such as Millennium Minerals, Regis Resources and Northern Star Resources adding to their existing forward sales positions.

“Barrier options have been absent from the hedge book since the mid-2000s amid efforts by nearly all gold miners to reduce hedge cover and complexity. Since the second half of 2013, the book had been becoming more and more dominated by forward sales, representing a continuing trend towards simple hedge structures,” the report read.

The Global Gold Hedge Book Analysis revealed that many hedged producers were reducing their hedged positions through scheduled deliveries or the expiry of options.

There was “little incentive” for producers to hedge at current gold prices, which have fallen so close to the industry average cost that producers near the top of the cost curve had “already missed their chance” to lock in positive margins, the analysis had discovered.

“Despite the high-profile and widely-discussed Polyus hedge, it would be incorrect to state that hedging has returned to wider acceptability among gold mining companies and their investors,” Societe Generale and Thomson Reuters GFMS commented in the analysis.

Further, cost-cutting initiatives were a more compelling strategy for producers, as many mine plans were based on the higher gold prices achieved during the past two to three years.