Fidelity hedges against gold price fluctuations

Fidelity Printers and Refiners is working on hedging to cover the gold cycle from buying to selling as it moves to guard against price fluctuations.

BY NDAMU SANDU

The move comes at a time when the country’s sole gold buyer had been incurring losses when gold prices fall between buying and selling.

This means that the company would have exported at a loss.

Hedging is a risk management method used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies or securities.

The introduction of hedging to cover the gold cycle from buying to selling is an addition to the use of the forward sales instrument that was introduced last year.

A forward sale is an agreement in which a lender sells a specific stream of future payment flows to an investor, usually done in order to hedge interest rate and — or exchange rate risk.

“At the moment, hedging is covering the period between shipment to Rand Refinery and eventually selling. This has given the company some level of protection against price fluctuations,” Fidelity said.

Fidelity uses Rand Refinery as an intermediary refinery since losing accreditation to the London Bullion Market Association (LBMA) in 2008.

LBMA members enjoy direct interface with international gold buyers and have capacity to sell the gold before it reaches the refinery thereby reducing impact of price fall risk.

“The company is also working on hedging to cover the whole cycle from buying to selling. The company is currently pursuing use of other hedging instruments such as options,” Fidelity said.

An option is a contract which gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date.

Fidelity discounts the ruling international market price by a percentage margin to cover its gold mobilisation, export and other operating costs.

After direct gold mobilisation and export expenses FPR realises a margin of at most 1% on gold sales, before factoring effects of price movements.

There were times the gold price had fallen between buying and selling such that the company had exported at a loss.
Gold production has been on the increase from 4,1 tonnes in 2009 to 13,9 tonnes last year. This year’s output is expected to reach 15 tonnes.

In the medium term, gold was projected to be the mainstay of the economy. Under the $50 million accelerated gold production initiative, gold output was projected to hit the 30 tonnes mark by 2020 generating revenue of $1,5 billion.

As part of measures to boost output, Fidelity Printers and Refiners will also enter into an agreement with the Zimbabwe Mining Development Corporation for the establishment of a special purpose vehicle to exploit gold under Fidelity’s ZimGold.

The vehicle will focus on harnessing low hanging gold resources with particular emphasis on alluvial and prolific reef deposits supported by bulk open pit mining and on old underperforming assets as a preferred mining method to enhance gold deliveries.

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