By Elliot Turner
AngloGold Ashanti (AU) will raise $1.37 billion in a share and bond offering in order to buy back the company’s hedges on the price of gold. AngloGold’s CEO, Mark Cutifani, said the following about the move:
Removing the hedge book represents the last phase of the balance sheet restructuring and once completed, is expected to give us full exposure to the gold price, widening profit margins and improving cash flow.
We investors should view AngloGold as breakout buyers in this case. This is essentially a position-taker with long exposure, adding to that long upon the chart breakout. Add in the seasonality element, and it looks as though AngloGold’s management is really tapping into the trader’s mentality. AngloGold is the fourth largest holding for noted hedge fund investor, John Paulson. Paulson rose to stardom in the hedge fund world on his bet against sub-prime. Not too long ago, he used some of his new-found fame in order to launch an fund exclusively focused on gold.
Gold has been an outstanding investment vehicle and a hot trade in this volatile macroeconomic climate. It is one of the few asset classes world-wide trading above its pre-financial crisis levels. With gold once again breaking higher, this is just the latest case of a gold company buying at elevated levels. Last September at this time, with gold set to embark on a breakout move above the $1,000 level, Barrick Gold Corporation (ABX) issued $3 billion in new stock in order to buy back $5.6 billion worth of hedges.
Take a look at a chart of gold (as represented by the (GLD)) since that time:
(Click to enlarge)
The first circle on the left is when Barrick announced their hedge buyback. At the time, some called the company crazy and the ever-faithful anti-gold crowd declared it the “contrarian indicator that marked the top of the gold market.” Sure enough, not only did that not mark the top, it marked the commencement of one of the most powerful moves for the precious metal. Now take a look at the bubble on the right of the chart. That circle highlights yesterday’s breakout candle in gold, which is accompanied by a nice spike in volume. Is it possible that management at AngloGold knows something about the supply/demand structure for the physical metal at this point?
With the bull market in gold continuing on its path higher, it is only natural for management at a gold company to want full exposure to the long in the precious metal. It is far too painful for a miner to tell shareholders that their profits are lagging their peers on account of hedging expenses. On the news today, shares of AngloGold are trading down $2.65, or 5.67% in early trading. For Barrick last year, the hedge buy back caused some short-term pain in the stock; however, when gold continued its breakout to new all-time highs, Barrick’s shares enjoyed an impressive rally along with the rest of the major miners.
Disclosure: Author long GLD and GDX