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jimbo "costs in Rand go up when the USD is weaker but to counter this the weak dollar usually causes a lift in commodity (inc vanadium) prices" that makes good sense thank you and explains the stance of BMN.
Hi taufour, My simplistic view of this is that costs in Rand go up when the USD is weaker but to counter this the weak dollar usually causes a lift in commodity (inc vanadium) prices. Therefore sales and profits on Vanadium products go up. I think both BMN and FB are saying that it's difficult to pick a direction to hedge that is worthwhile long term. Happy to be corrected as always.
Thanks for explaining that, fatbanker, it is helpful ... except that I still don't understand the reply given in the call:
"...so for us in a way, if you are losing a bit on one side, you are also gaining on the other side..." what does that actually mean in the context of BMN's currency positions? One side of what?
A year ago we had a strong USD and a relatively weak SAR. currently, relatively the SAR has strengthened to the USD so a similar trading performance period to period would flex the outcome by the extent of change in relative rates from period to period. I believe the BOD dont see an obvious trend which can be hedged against, as they cant predict all the macro influences so they choose to do nothing on hedging rather than incur the cost of betting on an outcome only to find it meanders the other way. currency hedging is basically buying an option which becomes available at a later date to make a currency buy or sell at rates chosen today. it involves a fee which is like an insurance premium for something that may or may not pay out to your benefit so there is always a cost and not always a benefit. sometimes the swings and roundabouts net out at not a lot and hedging is good in theory but not totally cost effective in practice. With a strong rand and a weaker usd currently, I think its a fair bet that during the year that will reverse. quarterly it produces big changes, annually not so much.
Here is the original question (27m40):
"The strong rand, or weak dollar, whichever way you look at it, is a big reason for costs rising at the moment, and can you just remind me whether you have currency hedging in place, and if not, are there any plans to do so?"
Here again is the reply:
"We do not do currency hedging, simply because our sales are predominantly US, the majority of them, and our costs are predominantly Rand, so for us in a way, if you are losing a bit on one side, you are also gaining on the other side. So, in short, we are not hedging."
Can anyone make sense of that?
Thanks fb. Very clear :)
hedging is only required when your income is in one currency and your outgoings or debt are in another. The bulk of what bmn do is in USD both in and out. They may have to convert usd to rand to pay local costs like wages, which involves the risk that one currency moves against the other changing the profit margin, but by and large bmn is a usd business. hedging would involve buying or selling forward amounts of currency needed later but at todays rates. not hedging doesnt imply losses, it can lead to windfall profits.
Yes Bumbling... If purchases are outside SA... But sales are higher as the $ goes up
+ On one side - on the other.... Not a perfect match but no need to hedge the small difference.... Yet
Our rand costs for production go up when we have to convert dollars from sales into rand to pay staff and buy materials. A strong rand means higher costs.
I don’t see how we gain though
I found this bit of the call at 33m44, in response to a query about currency hedging, hard to understand:
"We do not do currency hedging, simply because our sales are predominantly US, the majority of them, and our costs are predominantly Rand, so for us in a way, if you are losing a bit on one side, you are also gaining on the other side. So, in short, we are not hedging."
Help please?