Hedging in the Gold Miners

Victims of ZIRP

There are two ways to run a gold mining company. One respects the simple fact that it is producing money. It is not eager to trade its the money it produces for government paper, legal tender laws be damned. It keeps its books in gold, and produces and trades to earn more money (i.e. gold).

This article is about the other kind, the conventional gold miner in our dollarized world. With its books in dollars, and more importantly its debt in dollars, it must generate positive cash flow in dollars. Or else.

The share price of CDE (Coeur d’Alene Mining), which presented at the LBMA conference in Vienna. Similar to the shares of other gold and silver mining companies, its share price has been crushed. According to its most recent earnings report, it had slightly more than $1,50 per share in cash, but almost $4 per share in debt – click to enlarge.

It faces constant temptation (and shareholder pressure) to make a leveraged bet on the price of gold. If it wins, then its debts shrink in proportion. However, if it’s wrong and the gold price falls, it can be crushed into bankruptcy.

Such is the nature of having a debt in a foreign currency when that currency rises. Even though the dollar falls over the long term, there can be wicked periods when it is rising such as 2012-present.

At the LBMA conference in Vienna, the most interesting panel for me was the one on Producer Hedging and Price Risk Management. In fact, to this last point, Courtney Lynn, the Treasurer of Coeur Mining, said miners have no special foreknowledge of the gold price.

Her company, and that of another panelist — Petropavlovsk — are in debt. How do you run a company with dollar denominated debt and net revenues that sink or swim based on the gold price? You hedge the price of gold.