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Excellent posts today, most enlightening.
Exactly so, Ctw.
The debate does focus the mind on the potential here.
What we are all saying is that H1 at $1350 has the potential to pay the whole year's fixed debt and H2 ( plus any upside on the $1350 throughout the whole year and net of admin./Capex) will be pilling up on the balance sheet.
It is extraordinary that this remains at such a lowly market cap.
With all due respect, I think folks are over complicating the put option business, which is very clearly explained in the RNS. 60,000 ounces is roughly the entire production for H1. They have bought put options which give them the option (but no obligation) to sell those ounces at the strike price of £1350. Clearly the options will not be exercised unless the gold price falls below £1350 but, if it does, then they know that they can at least get the £1350 for the ounces sold under the options, thus ensuring that they can meet debt repayments. In effect, as the RNS states, they have put a floor under the gold price. It may well be that the number of ounces covered by the options reduces by a sixth each month but, if so, it matters not. If the price only falls below £1350 in the 6th month of the half year, and by that stage the cover provided by the options has reduced to only 10,000 ounces, fine, because that's all they have left to produce in that half year, having sold the other 50,000 at market rates above the strike price. It works the same way if they are only covered for 10,000 ounces in any of the six months, as they will only have 10,000 ounces to sell in any month. The precise mechanics don't matter but I am confident that the effect is as described. Any other interpretation is simply inconsistent with the plain words of the RNS in my opinion.
@Jpose
I dont think you understand how these options will likely work, or the purpose and reasons for hedging in commodity corporates. This is not about insuring tail risks, i.e. what you described. If it were, then the product being bought would be very different to that described in the RNS. These PUTS will very likely be monthly average options to roll off every month, i.e. 10k per month to match 50% of production. So we are likely already down to 50k oz left of a hedge or have fixed 1/6th of the average pricing period. If you were to "insure" downside risks you would hedge a larger volume of oz at a lower strike, say 120k oz at $1,200 and would roll the options each and every month.
Its inescapable that the hedge program put in place by Dan B is chicken feed in the form of protection against declines in revenue vs GP. If you are going to hedge you need to move the needle, otherwise dont bother to hedge. To any grade A mining exec I can assure you this is NOT a strategy.
Daily Gold Market Report
Gold resumes virus-related climb to start week, sentiment on favorable track overall
(USAGOLD – 1/27/2020) – Gold resumed its climb this morning to start the week as stock markets in Asia and Europe dropped sharply (from 2% to 3%) in response to the spreading coronavirus. The metal is up $12 in early trading at $1584. Silver is up 15¢ at $18.25. The Dow Jones Industrial Average is down 440 in the overnight mark as this report is posted. Reuters reports this morning that the virus has “subdued” demand for gold inside China itself, but one wonders how long that will last.
Beyond the virus-related impetus to pricing over the past several days, the notion lingers that gold market sentiment is on a favorable track overall. John Kaiser of Kaiser Research says “there are signs that the market is starting to take the move in gold seriously” – the early stages of a repricing he believes could push the metal to the $2000-$3000 range. “[T]here’s something different going on,” he said in an interview at the Vancouver Resource Investment Conference. I think we are in a period of increased, rising uncertainty similar to the (19)70s about what is America’s ongoing role in the world.”
DIM
Spelling the debt payment protection out more clearly.
We have been told that debt to be repaid in this year is $30 million ie that is a cash requirement in this next 12 months, as the company is de-leveraging at a phenomenally quick rate (and will leave the company as a cash cow).
Above $1350 per oz. is being regarded as "super profit" great to have, but not essential for debt repayments.
If gold drops below $1350, management want to protect the whole margin between the AISC of $850 ish and $1350, an amount of $500 per oz. and on 60,000 oz. that calculates as $30 million.
It is a specific hedge for the debt and will not be expensive, as it is unlikely to come into play: just like life insurance or mortgage protection insurance: you hope that you will not need it, but wise to have, until you have decent savings.
The administration costs are irrelevant, as they should be covered by the profits on the unhedged portion of production and in any event, some items are not cash (eg. share bonuses, ) and some will be discretionary spending.
Personally, I don't see the hedge coming into play, but had it not been taken out, a basic step in risk management, I would not increase my holding here. As it is, I see this as the next SLP, held down by unwarranted fears of a short LOM and failing to take on board the proximal opportunities to convert existing resources and underground exploration.
I am hoping for 120,000 oz (given the second ball mill), AISC of $850/$950 for 2020 and a clear road map for the upgrade of resources and exploration. The latter should provide the periodic RNS excitement to an otherwise solid year of production/pay down of debt.
@jpose. I just don't follow or understand any of your thinking or numbers on protection of debt repayments. You say in an Armageddon situation - like what scenario? Gold is a low vol product, downside moves in gold happen over long period of time, upside can happen quickly. Admin coats run close to $10m at HUM, and Dan hedged only 60k Oz. Your analysis of protection of debt payments is flawed, your numbers don't add up Read the RNS.
Oh, and GP up big today and.....HUM SP down. Go figure.
DIM
It is the wrong way of looking at the hedge, which protects debt repayment in the face of Armageddon.
So, with AISC (a reasonable approximation to cash flow) at around the $850 mark, the hedge protects that cash flow in the sum of $500 per oz. and on approximately 15,000 oz. per Q coming to $7,500,000 per Q or $30,000,000 per year.......which just about equates to the debt repayment scheduled for the year. (I assume that they may, closer to the time, hedge again for the second half, unless they are swimming in cash from H1, in which case, no need for the precaution).
It is a hedge fit for the specific purpose for which it was designed: comfort for shareholders and creditors/lenders that we are not going to be caught in the leveraging trap and hand over valuable assets for peanuts, as is seen time and again in the resources sector.
Give credit where it is due: this is an entirely transparent and wise management decision and should be welcomed.
@othodelagery - to put into numbers. If we had a immediate drop to trend around $1300/oz for balance of H1, then FY sales would fall by $30m (120k*$250/oz) and hedge worth $3m (60k*$50/oz). So the hedge has insured only 10% of drop in revs and profits, and irrelevant amount.
If GP fell to $1250/oz, the hedge would protect revs by only 16%, also irrelevant.
This analysis flatters even these weak numbers, as I suspect these are monthly average price options and would be rolling off each month, i.e. 60k, or 10k a month Jan to Jun.
Either way you see why this is just tinkering and not really hedging. The irony is that PIs that know their stuff will also see this as just irrelevant.
@othodelagery: We agree to disagree. This stock was at 30p plus at $1200/oz - yes there were problems, but if you believe in NPV, then at $1550/oz the stock should be much higher, but it isn't. That is an inescapable fact. The GP has moved higher, but the SP hasn't. I believe it is because no one trust Dan with future cashflows, or with a strategy to deliver the value of the company into the share price, be it through M&A, buy backs, divi's etc. Whilst that is an opinion, it has been proven correct in the run up in GP. Ergo, further GP rises will still be discounted and not represented properly into HUM's SP.
Given my opinion (you can disagree), capping the downside and therefore guaranteeing CF to delever the company is MUCH more important that allowing for upside. Hence I would have liked Dan to have hedged 100% of full year production at 1450/oz, and sold upside to pay for it - as the market has proven it does NOT reward HUM stock for increase in GP.
Whatever you opinion, I think its difficult to look at what Dan has done on hedging as being a "strategy". $1350/oz on half production is kind of irrelevant in the scheme of things and seems to been done on a whim without any real thought. It provides little protection in the scheme of things.
P/E less than 2 gold $1572.
Let’s have a good RNS and rerate.
@dropinmonkey: disagree entirely. They have always said their strategy is to give shareholders the uncapped upside. I would have been annoyed had they sold calls - though to be fair I am not expecting $1,700+ anytime soon. However, ensuring minimum pricing in light of the fast degearing is very prudent. Assuming stable production, they are guaranteed to hit the cash required to fully repay their debt. That’s got to be positive.
@Retiredbanker: for sure its not a great deal of premium, and funnily enough the 1750 calls are cheaper than $1/oz for same strike and expiry.
I think my point is that its not really a thought out hedging strategy, it partially hedges, the hedge only kicks on $200/oz from there we are now, etc. Its kind of like trying to do something to be seen to be doing something.
Better to load up and put the floor in at 1450/oz and sell the upside in my opinion - for exactly the valuation issue we all understand, that is to remove some of the price risk. Just an opinion, but no point mucking around on the edges.
Dropinmonkey, right now Jun 2020 Gold puts are trading at around $1 ... so the outlay is $60k.
I don't think you can really say "Dan snatches defeat from the jaws of victory" over a small amount like that.
What I can't fathom is how a gold miner with expected production of atleast 120k oz for 2020 and therefore (with gold above $1500 ) Net Profit of $50m+ for the year can still only be valued under 100m ... surely a p/e of 2 is so ridiculous that this has to re-rate soon
https://www.fxempire.com/forecasts/article/gold-price-forecast-gold-markets-rally-again-2-628288
Good point, but as I'm not on the ground I will bow to the management for that decision. Push comes to shove I would sooner go for it.
If acquiring some or all of CORA were earnings enhancing then it could be a good purchase but it doesn’t provide all the diversification you’d want from a second mine (I think) - same government, laws, climate etc.
In hindsight a sold call at 1750,- a great statement, before the event just nonsense....
A bit damned if you do, damned if you don't, but like most things with value, better to have some insurance. I suppose it depends on how much of a gambler you are, on which approach you prefer.
"IF" being the important word there. Same as saying "IF" the price of gold stays above 1350, then the puts were a waste of money. In hindsight a great statement, before the event just nonsense.
well, if the price of gold goes beyond e.g. 1750,- then Dan & friends were right not to sell calls...
Me too. Happy with things overall. When we are able, I would like to see if not 100% then atleast a significant increase CORA ownership. imo that will bode well for the future, and then co develop new starter mines.
The low cost put option route seems very sensible risk management to me.
Of course the POG makes a difference, its a gold mine, and as such they have reserves in the ground and as we know, stock piled high. Anybody eying HUM will look at the POG and the actions of the company and neither in isolation if they have half a brain. If the POG hit the floor and stayed there for whatever reason then there would not be investment in mining and mine shares would suffer. It was very brave of Dan an the team to invest in HUM at a time when gold mines where suffering from lack of investment. Yes we have had issues and there are things I am not happy with. However imo we are still very much invested in the right place its just the timing has changed for many. Me included. Patience is a hard thing to learn if you start off with little.
Dan should have sold calls to fund his put purchases. Ok nice to hedge the downside, but I dont think investors are buying HUM for open upside gold exposure - they buy it for the cash generation and value of the asset. Ergo - capping gold price at 1750/oz of the same period would not have affected the story, and would have saved the outlay on the premium. Yet again Dan snatches defeat from the jaws of victory