* Options make up 46 pct of hedge book vs 16 pct a year ago
* Producers use collar structures to protect revenues
By Jan Harvey
LONDON, July 30 Gold mining companies are
turning increasingly to derivatives to lock in future revenues,
as an industry still smarting from losing out on a 12-year bull
run gets creative over protecting its income during the metal's
While miners overall remain wary of hedging -- the
outstanding global hedge book stood at just 6.2 million ounces
at end March compared with 57.2 million a decade earlier --
those who do favour the strategy are leaning more strongly
Data released this month from Societe Generale and GFMS
analysts at Thomson Reuters showed options structures made up 46
percent of the global hedge book by the end of the first quarter
of 2015, compared with just 16 percent in the same period a year
before and 11 percent in 2013.
Hedging allows miners to lock in the price of their output,
usually by selling future production forward. This offers
protection from falling gold prices, but means they can lose out
if prices rise sharply.
Big mining companies lost billions closing out hedges during
a 12-year rally that took gold prices to record highs in 2011
just shy of $2,000 per ounce.
Since then, hedging has been heavily out of favour with most
of the biggest miners, and prices have continued to decline,
with last week's slump to 5-1/2 year lows seen opening the way
to further losses.
Some miners are now stepping back into hedging, but the
profile of those deals has changed. Their hedges tend to be
smaller, cover shorter timeframes, are often project-specific,
and are more frequently options-based.
Rather than simply selling metal forward, options allow
miners to put together more complex structures like zero-cost
collars to protect revenues.
"People don't like risk, but they don't like paying for
insurance," Mitsui Precious Metals analyst David Jollie said.
"With options, if you just bought puts, you're paying money
for them, but you might be able to cover that by selling calls
some way above the market, and giving up some of the upside
Under a collar structure, companies buy a put option, giving
the option to sell at a given point, funded by the sale of a
call option -- which gives the option to buy -- at a higher
If the price falls, the company is protected by exercising
the option to sell at the strike price -- though if prices rise
they lose the upside above the strike price of the call.
Options structures added last year by the likes of Polyus
Gold helped to push the industry into net hedging for
only the second time in 15 years.
Polyus used both zero-cost Asian collars and forward sales
to put together the biggest hedging deal since the late 1990s.
"Flexibility was the main reason behind choosing options over
forwards," a spokesman for the company said.
Polyus expects gold to be rangebound over the next few
years, he said, but cannot ignore downside risks to the price.
"If the gold price increases, it will be a good problem to
have, as we hedged our output only partially. But if the market
turns and the price falls, our cash flows are protected."
Australia's OceanaGold said it has hedged using New
Zealand dollar gold collars.
"We bought a series of New Zealand gold put options, the
cost of which was offset by the sale of a series of New Zealand
gold call options at a higher strike price," it said.
"A collar provides slightly more flexibility," it added. "We
achieve the spot price over a defined range, rather than
achieving a single set price."
(Reporting by Jan Harvey; Editing by Veronica Brown and Susan