UPDATE 1-Detour Gold could hedge if bullion price falls further -CEO

Tue Jan 28, 2014 5:09pm EST

Related Topics

By Euan Rocha

TORONTO Jan 28 (Reuters) - Detour Gold Corp would consider using a hedging strategy if the price of gold drops from current levels, the Canadian gold miner's interim Chief Executive Paul Martin said on Tuesday.

The board of directors has given approval for management to hedge up to 50 percent of the output from its Detour Lake gold mine in northern Ontario, if circumstances require such action, said Martin, speaking from the sidelines of the TD Securities Mining Conference in Toronto.

Martin, who was named interim chief executive in November, said Detour does not have a set gold price at which it would deploy such a strategy. He said that the company is constantly assessing the situation, but stressed that any hedging strategy, if used, would be very short term in nature.

Hedging, or selling production forward, is sometimes used to shield mining companies from falling prices, but it also stops them benefiting from gains.

The strategy was a staple in the gold industry during the 1990s and over the turn of the century, when gold prices were in the doldrums. Following a decade-long bull run in the price of gold, the strategy fell out of favor with miners and investors, who punished miners that stuck with gold hedges.

The world's largest gold producer, Barrick Gold, which once had an extensive hedging strategy in place, unwound its gold hedges in 2009 and raised more than $5 billion to do so, just so that it could benefit as the price of gold rose.

But with the price of spot gold falling more than 35 percent since peaking at more than $1,900 an ounce in 2011, miners are once again considering hedging strategies that were not long ago deemed taboo in the industry.

In December, Barrick Gold's incoming chairman John Thornton stunned markets by admitting that the company would consider a hedging strategy, given the volatility in gold prices.

Some miners have tentatively moved back to hedging. Last year, Russian-focused miner Petropavlovsk said it would hedge about half its output to March 2014.

Detour, which began production at its Detour Lake mine in early 2013, is in ramp-up mode, with output from its mine expected to rise to 450,000 to 500,000 ounces in 2014, from just over 230,000 ounces in 2013.

Production costs at the mine, however, are expected to be high in 2014 with all-in-sustaining cash costs staying above $1,000 an ounce, due to additional capital expenditure costs at the site through the year.

Shares in Detour have fallen some 77 percent in the last two years amid the slump in the price of gold and investor concerns around the company's debt load. The company has $500 million in convertible notes that come due in 2017, however, the notes are out of the money and some investors fear that the company may be forced to issue additional equity to repay the notes.

The company's stock has rallied a bit this year as gold has ticked slightly higher from below $1,200 an ounce. Shares in the company, which are up more than 50 percent this year, closed at C$6.36 on Tuesday on the Toronto Stock Exchange.

FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article