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8/27/19

Precious metals hedging: Just say no

Your humble scribe enjoyed an interesting conversation on the subject of hedging yesterday, on the back of this news out of Argonaut Gold (AR.to) yesterday:
TORONTO , Aug. 26, 2019 /CNW/ - Argonaut Gold Inc. (the "Company", "Argonaut" or "Argonaut Gold") (AR.TO) announces the Company has entered into a series of zero-cost collar option contracts, which were approved by the Board of Directors.  The contracts cover a total of 145,500 ounces of gold through mid-2022.  The floor price of the monthly gold collars has been set at $1,450 /oz with the ceiling price of the collars ranging from $1,630 /oz in the fourth quarter ("Q4") of 2019 to $1,760 /oz for the first half ("H1") of 2022.

It continues, with a head honcho who doth protest too much methinks as Prez/CEO Dougherty informed us of the corporate strategy and philosophy behind the decision to put on those "costless" collars (in speech marks because as we have noted previously, they are far from that) and bizarrely trying to compare the hedge with the whole of AR.to's resource base. The bottom line is that AR.to has hedged between 35% and 40% of its expected 2020 and 2021 production, plus a couple of smaller hedges in 4q19 and 1h22, at a baseline price of U$1,450/oz with the top end of the costless collars between 1630 and 1760 (prices their CFO hopes will not get broken during the hedge program). They've done this to ensure getting at least U$1,450/oz for their gold ounces and in that way guarantee its old and high cash cost mine El Castillo remains profitable.

Which is also complete bullshit for shareholders of course, the subject of yesterday's conversation with a friend. There are many factors involved with hedging precious metals, but at the brass tacks level it is an act of risk transference. There is always risk in mining (operational, price, execution etc) and we as shareholders, investors and speculators know this (or we damned well should by now). The risk is not diminished by a adoption of a hedging program and in fact, you can argue that risk is increased by the upper limit price of a costless collar because if it breaks, the hedger will start losing money. However, what does happen is the risk is transferred from the company and placed on the shoulders of shareholders; by selling its gold at a minimum of 1450, AR.to has removed risk from El Castillo and placed it on the company's financials. That's us, ladies and gentlemen. In effect, what AR.to has done is stated clearly that its interests are less aligned with shareholders and more about keeping their mine running. They prefer to guarantee their own jobs over the improvement of the company share price, as one of the most obvious moments to buy mining stocks is when the price of its underlying metal product moves higher. If gold runs further, shareholders will not get the blue sky benefit of the run and the company will be made to pay for their strategy (quite literally) that will crimp the share price.

Of course, companies and their C-suite decision makers have the right to do what they want with their company and if one of those corporate lines is "maintain our mines open at all costs" then that's their decision. But we shareholders don't have to put up with their self-serving, corporate cowardice. If you want to experience the full bang-per-buck opportunity that gold is currently offering you in the market, it's time to own precious metals mining stocks but you need to avoid the mediocrity in order to achieve the best gains. One of the clear signposts is not buying gold companies that hedge their production because their decision takes blue sky gain potential and your share upside away from you. Go find another stock to buy.