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$1564. Looks like a floor at $1500. Lets hope its a solid base to build from. Timing is good, and many predict $1600 well achievable Q1.
Very happy with golds range. Going to be a great start to the year for HUM.
The POG is irrelevant for HUM for the next 6 months, as they have fixed their sales by buying put options at $1,350 per oz (per last RNS). I did email the Company asking who the counterpart to this transaction was as it looks way below spot price during the period, but as per usual I have not received any response. Very poor investor relations. AW
Not correct. Buying put options is only insurance and only has value if the POG drops below $1350 (plus the premium they paid) If they had financed that purchase with selling calls (as they should have done) then the price movement would have no affect. As it stands, they can still participate in an upside move.
They haven’t stated they have sold calls, so no collar and cuffs here. This looks like just a naked hedge so the loss on the put will offset the additional sales on the increased POG.
That’s not correct. Given outlook for gold, I suspect the pits were relatively inexpensive and still provide HUM with plenty of upside above the $1,350 hedge price. Moreover the hedge covers only a proportion of likely output, so either way considerable upside on the other proportion of output. They appear to me have taken a sensible risk approach recognising the breakeven point they need to be to ensure they can meet the debt amortisation profile.
Gold Sales and Pricing Strategy:
" The Company remains committed to operating as an unhedged gold producer. However, as a single asset producer with approximately US$30m of debt scheduled for repayment in the next 12 months, a significant fall in the gold price could materially impact the Group's ability to service debt and meet operating costs. Accordingly, the Group has sought to insure against this risk by investing in low cost put options at a strike price of US$1,350 per ounce over 60,000 ounces of gold in H1 2020, to effectively place a floor on the gold price without capping the exposure to the upside. "
One can critizize a lot what Dan & friends are doing, but the way they handle the gold sales & pricing makes sense.
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
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.
The low cost put option route seems very sensible risk management to me.
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.
well, if the price of gold goes beyond e.g. 1750,- then Dan & friends were right not to sell calls...
"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.
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.
In hindsight a sold call at 1750,- a great statement, before the event just nonsense....
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.
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.
https://www.fxempire.com/forecasts/article/gold-price-forecast-gold-markets-rally-again-2-628288
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
@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: 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.
P/E less than 2 gold $1572.
Let’s have a good RNS and rerate.
@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.
@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.
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.