Oceana Gold, the operator of the East Otago Macraes gold project, is attempting to shield itself from further gold-price falls by introducing a ''collar'' around the price it will receive for gold over the next two years.
The company has entered into a zero cost collar hedging programme for 208,000 ounces, partially covering production for the next two years at the Macraes open pit and the Frasers underground.
The programme entails a series of bought put options creating a floor of $NZ1500 an ounce ($US1230, assuming a New Zealand-US cross at US82c) for the gold starting this month through to December 2015.
If the spot gold price falls below $1500 an ounce, the company receives $1500. If the price falls to between $1500 to $1600, the company will sell gold at the spot price. If the spot price rises above $1600, the company sells the gold at $1600 an ounce.
Craigs Investment Partners broker Peter McIntyre said the spot price yesterday was about $US1200 but cash costs from Oceana's New Zealand operations, which included Reefton, were forecast this year to be between $US1170 and $US1290 an ounce. The company was either making very little money or it was losing money from the project.
The company was stopping mining the low-grade ore and concentrating on the underground operations, he said.
''The cost of getting the ore out of the ground is increasing. The deeper they go, the more it costs.''
Putting the collar on the price was wise as there were no indications the gold price would go up any time soon, Mr McIntyre said.
The reasons for a lower gold price included: interest rates moving upwards in New Zealand, putting pressure on the kiwi; the United States Federal Reserve withdrawing support from financial markets; economic improvement in Europe; and growing fiscal stability around the world.
''There is no reason to hold gold. But it is not a dying industry. Gold has been produced for thousands of years and is still a signal of wealth. It is just the next 12 months to two years are not looking good.''
Oceana had proved it was quick to make decisions, despite it not being easy to deal with the ''human face'' of restructuring, he said. Oceana was not the only company struggling. Newcrest Mining, in Australia, had been Australasia's premium mining company. Yesterday, its shares were trading at $A8.48 with market capitalisation of $A6.5 billion. In November 2010, the shares traded at $A43.46.
Goldmining companies had struggled and they had not protected themselves through hedging - exposing themselves to the spot price.
''When the spot price moves down without cover, it is a dark and daunting place to be.''
European nations were large holders of gold but they had been ''dribbling'' their reserves out to meet commitments to the European Central Bank, also affecting the gold price.
Gold usually rose on a falling US dollar, but with the Fed easing its financial support the dollar was set to rise, Mr McIntyre said.
In a media release, Oceana said it was planning to produce 275,000 ounces to 305,000 ounces of gold at cash costs of $US400 to $US450 per ounce, net of by-product credits, which include copper extracted from Didipio. The cost before credits was set at $US750 to $US850 an ounce, which showed Didipio was cash cost negative.
Total capital expenditure for the company was forecast to be between $US80 million to $US100 million, significantly lower than the previous year, reflecting the cost savings announced during 2013 and the new Macraes plan announced on Tuesday.
