"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, September 10, 2013

Miners' Hedging back in the News

While reading through some of the newswires stories this AM, I came across an interesting report about Pan American Silver.

You might recall that I had recently written that I believed we were going to see the increased use of hedging among gold and silver miners in order to get themselves some downside price protection and to actually lock in some profits during a period in time of wildly unpredictable price swings in the precious metals.

The story from Down Jones reports comments from CEO Geoff Burns as stating that PAAS had recently instituted hedges in order to reduce risk originating from the wild price swings. Here is his quote:

"Our action may have inadvertently sent the wrong message to the market and to our shareholders about our hedging philosophy and our view of the long-term prospects for silver and gold".

He also stated that he was "considerably more optimistic" about the short term prospects for both metals.

"More importantly, we need to unequivocally reassure our shareholders that the company's fundamental philosophy is still that of not hedging our precious metal production, thereby providing maximum exposure to the price of silver".

The report went on to say that PAAS had entered into forward contracts ( a means of hedging) 20% of its forecasted silver production and 18% of gold production.

They are now delivering the metal and repurchasing in order to close out all of these forward contracts before the end of the current year.

The thing I came away from reading the report is that the company instituted these hedges as part of "a short-term tactical response" to market conditions.

Apparently PAAS feels that the worst of the price decline in the precious metals is over. Remember, this is the thinking of one mining company but I did find it interesting that they were willing to employ some strategic hedging. They are to be commended for that in my opinion as mining companies should not be in the business of losing profits from mining operations. If they can lock in a decent profit on some of their production and mitigate or eliminate that risk, then they are wise to do so.

I would suggest that mining companies do not have the best track record when it comes to the prediction of gold and silver prices. I am of the opinion that any business, whether it be mining, agriculture, etc., that does not take steps to mitigate price risk is taking reckless chances with its shareholders' wealth. It in essence, has become a speculator in its own right. As a speculator, I do not need any mining company I might have chosen to invest in to be speculating on my behalf. I want them to show CONSISTENT and GROWING profits. If hedging is a means to do that, then so be it. I would much rather have a company that misses some upside rather than one that becomes unprofitable and ends up losing money for me. Heck, I can do that easily enough myself as a commodity trader!