Hedging means that you can PROVE that you can repay your debts ..... or at least service your debts ... irrespective of what price Gold is trading at ..... it is really really sensible ..... it means that the business is being prudently managed for the long term.
I know this strategy sits uncomfortably with some shareholders ... but long term investors should feel positive that the management are taking a prudent approach for the future.
I think hedging at $1408 is a master stroke ....... it clearly says ... we can service our debts if the gold price drops ... and we can generate huge profits (from the un-hedged gold) if gold price rises .....
I know I'm in the minority ... but then ... I am holding these for the long term !
All this hedging and debt. Hedging sounds like ew betting - admitting defeat before you've even started. Also they state that hedging doesn't reflect on what they see the gold US$ gold price being. What does that mean? No wonder the share price keeps falling, I'm rapidly losing patience. All these broker buys - it seems to mean absolutely squat diddley.
Petropavlovsk’s valuation remains too high at spot gold prices, in our view
Petropavlovsk’s NPV sensitivity to the gold price remains extremely elevated owing to its high cost structure, and high net debt levels. Based on spot gold prices of USD 1,380/oz we calculate an NPV, using a 5% discount rate of 131p (and when including net debt within precious metals business, 76p of this value is driven by its Hong Kong listed iron ore subsidiary IRC). There is an element of optionality that begins to be priced in at lower levels of visible forward cash flow (but where there is significant installed production capacity and potential resource, like in the South African platinum producers); however, with the declining iron ore price and the uncertainty around 2014 precious metals cash flows we maintain our Reduce recommendation. Our 125p price target is based on 0.5x P/NPV using the USD 1,500/oz target gold price we use across the sector.
I don't understand your comment. Gold is currently trading at sub $1400 and we are hedged at $1600 .... and it is having zero impact on the performance of this share... but we are currently getting $200/oz more than the market price.
If gold rises to $1600 in 2014 and we are hedged at $1408 ..... then we are $200/oz under market value ... but all of the $200/oz above market value (we are currently achieving) more than offsets this ....
Surely ... in such a volatile market .... what this company needs is certainty ... and longevity .....
The hedging of gold at $1408 makes a lot of sense (to me) as a businessman .... as it brings certainty that the business will survive the short / medium term. It also brings some certainty with regard to income / expenditure and the management should be able to manage their P&L much better knowing the price that they will achieve for the gold that the produce.
If the business survives the short term ... it will be hugely successful in the long term ... as the long term trend for gold prices must be UP.
However - I think this share is unloved by the stock market at the moment ....
With gold currently hedged at $1600+ - you would have thought that the share price would have performed better (but, of course, it hasn't) ... and now future production is hedged at $1408 ... the share price falls again ..... it's as if the management can only do wrong in the eyes of the stock market - even though what they are doing is protecting the business ......
So, another possible reason to hedge at $1408 is to bring certainty for a future buyer. ie: A Private Equity company looking to invest would like to have some certainty on the return on their investment.
In my opinion ... this is about to be taken private .... the intriguing question is "A what price per share" .....
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