Global Hedge Book AnalysisQ1-2007

May 2007

In addition to being widely used as industrial metals, precious metals have continued to demonstrate that they still represent an investment option in times of uncertainty1.

With a large choice of references and a wide range of products, Société Générale Corporate & Investment Banking has the answer to most precious metals risk management requirements.

Société Générale Corporate & Investment Banking is a member of the LONDON GOLD FIXING.

A LARGE CHOICE OF REFERENCES

Société Générale Corporate & Investment Banking Commodities Department provides around-the-clock competitive quotes for all types of hedging products, with maturities of up to fifteen years for gold, in US dollars, Australian dollars, Canadian dollars or any major currency.

Gold Silver Palladium Platinum

PHYSICAL SALES

Société Générale Corporate & Investment Banking has been active in physical gold and silver since 1997.

Société Générale Corporate & Investment Banking is one of the active banks in the Asian marketplace, mainly in India but also in the Middle East and Turkey.

Société Générale Corporate & Investment Banking offers value-added products including:– Gold & Silver spot Market-making;– pricing on Gold Fixings;– off-take of physical metal (including insurance

and transport);– refining capacity.

Société Générale Corporate & Investment Banking provides services for banks such as: – Consignment;– overdraft facilities;– spot physical.

A WORLDWIDE SERVICE

Société Générale Corporate & Investment Banking’s teams in Paris, London, New York, Sydney and Singapore provide services for:– producers to hedge future production and

help fi nance their operations;– central banks to enhance the management

of their gold reserves;– refi ners and end-users to hedge their metal risks;– investors to make the most of market opportunities

and broaden their range of risk management products.

A WIDE PRODUCT RANGE

Société Générale Corporate & Investment Banking provides hedging products including:– spot Market-making as Market-maker

of the LBMA (London Bullion Market Association);– pricing on Gold Fixings as Member

of the London Gold Fixing;– standard forwards (swap rates)

and outright forward prices;– lease rates;– forward rate agreements for swap rates

and lease rates;– fixed/floating metal rate swaps;– options Market-making;– exotic options including Asian-style options

(options on average) and barrier options.

A Société Générale Corporate & Investment Bankingdedicated team of research specialists provides:

– customer tailor-made presentations and direct answers to questions;

– regular research publications (e-mail, website);

– daily technical analysis publications.

1 Source: Les Echos 12/20/04

704623C_commodities19.indd 3 13/02/07 15:39:25

3

© Copyright GFMS Ltd - May, 2007

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior written permission of the copyright owner. Brief extracts may be reproduced only for the purpose of criticism or review and provided that they are accompanied by a clear acknowledgement as to their source and the name of the copyright owner.

Whilst every effort has been made to ensure the accuracy of the information in this document, GFMS Ltd cannot guarantee such accuracy. Furthermore, the material contained herewith has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient or organisation. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any commodities, securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. GFMS Ltd does not accept responsibility for any losses or damages arising directly, or indirectly, from the use of this document.

Contents

Key Points 4 Summary and Overview 4 Market Commentary 5 Composition and Sensitivity of the Global Hedge Book 7 Company Activity 8 Outlook 9 Technical Annex 11 Glossary 12 About GFMS 13 About Brady plc 13

In addition to being widely used as industrial metals, precious metals have continued to demonstrate that they still represent an investment option in times of uncertainty1.

With a large choice of references and a wide range of products, Société Générale Corporate & Investment Banking has the answer to most precious metals risk management requirements.

Société Générale Corporate & Investment Banking is a member of the LONDON GOLD FIXING.

A LARGE CHOICE OF REFERENCES

Société Générale Corporate & Investment Banking Commodities Department provides around-the-clock competitive quotes for all types of hedging products, with maturities of up to fifteen years for gold, in US dollars, Australian dollars, Canadian dollars or any major currency.

Gold Silver Palladium Platinum

PHYSICAL SALES

Société Générale Corporate & Investment Banking has been active in physical gold and silver since 1997.

Société Générale Corporate & Investment Banking is one of the active banks in the Asian marketplace, mainly in India but also in the Middle East and Turkey.

Société Générale Corporate & Investment Banking offers value-added products including:– Gold & Silver spot Market-making;– pricing on Gold Fixings;– off-take of physical metal (including insurance

and transport);– refining capacity.

Société Générale Corporate & Investment Banking provides services for banks such as: – Consignment;– overdraft facilities;– spot physical.

A WORLDWIDE SERVICE

Société Générale Corporate & Investment Banking’s teams in Paris, London, New York, Sydney and Singapore provide services for:– producers to hedge future production and

help fi nance their operations;– central banks to enhance the management

of their gold reserves;– refi ners and end-users to hedge their metal risks;– investors to make the most of market opportunities

and broaden their range of risk management products.

A WIDE PRODUCT RANGE

Société Générale Corporate & Investment Banking provides hedging products including:– spot Market-making as Market-maker

of the LBMA (London Bullion Market Association);– pricing on Gold Fixings as Member

of the London Gold Fixing;– standard forwards (swap rates)

and outright forward prices;– lease rates;– forward rate agreements for swap rates

and lease rates;– fixed/floating metal rate swaps;– options Market-making;– exotic options including Asian-style options

(options on average) and barrier options.

A Société Générale Corporate & Investment Bankingdedicated team of research specialists provides:

– customer tailor-made presentations and direct answers to questions;

– regular research publications (e-mail, website);

– daily technical analysis publications.

1 Source: Les Echos 12/20/04

704623C_commodities19.indd 3 13/02/07 15:39:25

4

Composition of the Delta-Adjusted Global Hedge Book (end period)

Key PointsDe-hedging was boosted by buy-backs in

the March quarter with a provisional 4.12 Moz

(128 t) cut in the outstanding delta-adjusted

hedge book.

Barrick’s reduction in its corporate gold

sale contracts and Gold Fields’ elimination of

the South Deep hedge accounted for roughly

two-thirds of gross de-hedging.

At end-March, total outstanding producer

positions on a delta-adjusted basis amounted

to 39.89 Moz (1,241 t).

A 7% quarter-on-quarter improvement in the

hedge book marked-to-market, despite a 5%

rise in the spot price used to value the book,

was explained by the impact of producer buy-

backs.

Summary and OverviewFollowing a restrained six months of de-hedging

in the second half of 2006, activity accelerated in

the March quarter with the impact of two major buy

backs, taking headline de-hedging to a substantial

4.12 Moz (128 t). In addition to the Barrick buy

back and Gold Field’s elimination of the South

Deep hedge book, Buenaventura announced

that it had bought back 25% of its outstanding

commitments.

•

•

•

•A further contribution was provided by AngloGold

Ashanti who made a noteworthy reduction in the

net delta hedge against its outstanding forward-

pricing commitments, which together with the other

three big changes in hedge cover outlined above,

accounted for close to 90% of gross de-hedging.

Fresh hedging during the quarter included

positions taken by Etruscan Resources, St Barbara

Mines and View Resources. Strategies included

zero cost collar structures, the purchase of put

options and a forward sales programme. In total,

these three players added (on a net basis) just over

500,000 ounces (16 t) to the global delta-adjusted

hedge book.

Change (Moz) 06.Q4 07.Q1 qoq

Forwards & Loans 30.28 27.14 -10%

Options 13.72 12.75 -7%

Total 44.00 39.89 -9%

Note: Totals may not add due to independent rounding. Numbers are provisional and may be revised. At the time of going to press, some companies had not reported their hedge positions. In these cases, GFMS have made estimates. Source: GFMS

Net Impact of Producer Hedging

-6.0

-4.5

-3.0

-1.5

0.0

1.5

3.0

Q1-07Q3-06Q1-06Q3-05Q1-05Q3-04Q1-04Q3-03Q1-03Q3-02Q1-02Q3-01Q1-01Q3-00Q1-00200

300

400

500

600

700

Millionounces

US$/oz

Net Impact of forward and option on bullion market

Gold Price(Average, pm fix)

Source: GFMS

5

Investor activity, once again, played a dominant

role in the direction that the gold price traced

out, which strengthened to record an average for

the period of $649.82, a 6% increase quarter-

on-quarter. Average realised prices reported by

producers did not, however, equal the gains in

spot, with a more muted 3% rise.

The outlook for de-hedging in the June quarter is

for another healthy cut in the outstanding delta-

adjusted position. In the second half, however,

de-hedging is expected to return to levels closer to

the run rate of the book, which currently stands at

around 1.0 Moz (31 t) per quarter.

Market CommentaryFollowing a rash of investor liquidations in early

January, chiefly on the back of a decline in the

oil price related to weather expectations, and

later exacerbated by the release of positive US

employment data, the gold price dropped by $33 to

reach a quarter low on 8th January of $609.50.

A rapid recovery, thereafter, saw the price rally to

a period high of $685.75 in late February, although

a second, sharper, correction knocked $49 off

the metal before an upwind, once again driven

by investor buying, lifted the price to $661.75 by

end-quarter. This compared to the spot price used

to value the option contracts at end-December of

$632.00 representing a 5% increase quarter-on-

quarter.

The average price for the three months to March

stood at $649.82, a 6% quarter-on-quarter rise and

an increase sufficient to break the all time record

for average quarterly prices (the previous record

having been $648.91 in the third quarter of 1980).

After a largely unimpressive last quarter in 2006,

investors moved back into gold in the three months

to March. Although the market received support

from both increased de-hedging and lower net

official sector sales, there is little doubt that a key

component of the rallying price, as outlined above,

was investor buying.

Prices (quarterly average) Change 06.Q4 07.Q1 qoq

US$/oz spot 613.21 649.82 6%

US$/oz 12-mth 645.06 683.17 6%

Euro/kg 15,302 15,941 4%

Yen/g 2,320 2,494 8%

TL/g 28.73 29.47 3%

Rps/10g 9,015 9,314 3%

Rph/g 180,152 190,245 6%

Rand/kg 144,410 151,315 5%

A$/oz 796.77 826.45 4%

Rouble/g 524.37 549.47 5%

Source: Reuters EcoWin

Speculative Net Positions in CBOT & Comex Futures

Leasing Rates (monthly average)

Contracts(thousands)

US$/oz

0

50

100

150

200

250

Jan-07JulJan-06JulJan-05

350

450

550

650

750

Comex/Nymex: Non-commercial Net PositionsWeekly Net Positions and Settlement Price

CBOT

Comex

ComexSettlementPrice

Source: CFTC, Comex

0.0

0.3

0.6

0.9

1.2

1.5

12-month3-month1-month

Jan-07Jan-06Jan-05Jan-04Jan-03Jan-02

LeaseRate(%)

Gold Lease Rates

Source: LBMA

6

Of course, investor activity was by no means a

one-way street and following the collapse in global

equities, triggered by a crash in Chinese stocks

on 27th February, there was a major liquidation

in gold. This move was thought to have been

partly triggered by investors looking to reduce

their exposure in unrelated investments, as well

as raising cash to meet obligations in the equity

markets.

As the quarter came to a close, the gold price

received a boost from increasing energy prices due

to the combination of a gasoline squeeze in North

America and increased tensions between the UK

and Iran following the capture of 15 British sailors

who had allegedly strayed into Iranian waters.

Turning to the holdings of the seven active ETFs,

holdings increased by 1.16 Moz (36 t) during

the three months to March, with the bulk of the

growth accounted for by inflows into the New York

Stock Exchange and Singapore Exchange listed

streetTRACKS Gold Shares, whose total reserves

amounted to 15.6 Moz (484 t) by end-March.

Based on official IMF statistics, data available from

individual central banks’ websites and in the media,

as well as information on unannounced official

activity obtained through field research, GFMS’

provisional estimates for net official sector sales in

the period stood at 3.05 Moz (95 t), essentially flat

year-on-year. The quarter saw sales by Central

Bank Gold Agreement (CBGA) signatories decline

markedly. This was offset by the swing in countries

outside the group from net purchases of 1.13 Moz

(35 t) in the first quarter of last year to sales of

707,322 ounces (22 t) in the first three months of

2007. Breaking down the figure in more detail,

sellers within the CBGA group included Spain,

France and Sweden. Outside the group, Indonesia

and the Philippines reported a reduction in their

gold reserves while increases were measured,

among others, in Kazakhstan, Mongolia and Qatar.

Lease rates registered a modest increase but

remained at historically low levels. The 3-month

rate, for instance, averaged 13 basis points,

compared to 12 basis points in the previous

quarter, while the 12-month rate averaged 18 basis

points, up from 11 basis points in the fourth quarter

of 2006. (Indicative only. Calculated on the basis

of LIBOR minus GOFO.)

Despite the resurgence of physical buying on the

back of a sharp decline in prices during the first

week of January - bullion imports, for example, into

Turkey, India, Hong Kong and even Italy were all up

notably - the strong rally in prices during February,

is thought to have significantly undermined this

initial bounce. Provisional jewellery fabrication

figures for the first quarter point to a 9% decline

quarter-on-quarter compared to a 9% increase

year-on-year.

Mine production is thought to have registered

a modest increase in the first quarter, the 1%

improvement year-on-year leaving total global

output at 18.65 Moz (580 t). At an operational level

the biggest support came from Freeport’s Grasberg

copper-gold mine in Indonesia which reported a

more than two-fold increase in gold output from

461,800 ounces (14.4 t) in the first quarter of 2006

to 1.07 Moz (33.3 t) in the three months to March

2007.

Gold ETFs & Other Similar Products

0

100

200

300

400

500

600

700

800

Jan-07Jan-06Jan-05Jan-04Jan-03

Tonnes

US$/oz

Gold Price

Source: Respective ETF Issuers

300

350

400

450

500

550

600

650

700

750

7

Q1 Delta-Adjusted Position

Elsewhere, Barrick’s new batch of gold mines

accounted for part of the 4% year-on-year rise

in the company’s reported production, while

Newcrest, posted a 6% improvement in output,

chiefly attributed to the addition of underground

operations at Kencana (Gosowong), which had

commenced during the second quarter 2006.

Partly offsetting the growth during the quarter,

Newmont, AngloGold Ashanti and Gold Fields

all reported lower production levels year-on-year.

Losses at Newmont were largely concentrated at

the company’s joint venture Yanacocha operation

where output tumbled by 382,000 ounces (11.9 t),

or 48% year-on-year.

Composition and Sensitivity of the Global Hedge BookThe nominal global hedge book at end-March

2007 stood at a provisional 43.15 Moz (1,342 t)

representing a decline from the position at end-

December of 3.14 Moz (98 t) in forwards and gold

loans and an equally substantial 2.49 Moz (77 t)

decline in the outstanding options contracts. The

cut in the latter category was a notable change

from the fairly muted level of de-hedging witnessed

in the options book over the last two quarters.

Breaking down the nominal book in a little more

detail, the net call position totalled 12.7 Moz (396

t), while the net put position amounted to 3.29

Moz (102 t). Given the significant decline of the

non-vanilla contracts over the last few years, which

has seen the position erode from close to 6.0 Moz

(187 t) at end-December 2002 to less than 100,000

ounces (3.1 t) at end-March 2007, the non-vanilla

option contracts have not been identified as a

separate item in the summary table on page 4.

On a compositional basis, forwards accounted for

60% of the total nominal hedge book, gold loans

3% and options contracts 37%. Compared to

the split at end-December the situation was little

changed, although on a year-on-year basis this

represented a notable shift in the make-up of the

book, with the corresponding figures at end-March

2006 standing at forwards 66%, gold loans 2%

and options 32%. The shift in the composition

of the book over the year was chiefly explained

by the rapid decline in forward sales through buy

backs and against a modest return to fresh options

hedging.

In delta-adjusted terms the headline decline in

the outstanding global hedge book in the March

quarter amounted to a substantial 4.12 Moz (128

t), composed of the aforementioned 3.14 Moz (98

t) cut in forward sales an gold loans and a 980,000

ounces (30 t) decline in the options book.

Sensitivity of Q1 Options Book

Move in Move in Gold Volatility Price ($/oz)

(%)

-200 -100 0 100 200

4 9.1 11.1 12.5 13.1 13.3

2 9.0 11.2 12.6 13.2 13.4

1 9.0 11.2 12.7 13.3 13.4

0 9.0 11.3 12.7 13.3 13.4

-1 9.0 11.3 12.8 13.4 13.4

-2 9.0 11.4 12.9 13.4 13.4

-4 9.1 11.5 13.0 13.5 13.5

Source: GFMS

Note: the delta-adjusted total options book at end-Q1 was calculated at 12.7 Moz. The matrix above shows changes in the delta-adjusted volume under different gold prices and volatilities.

0

3

6

9

12

15

1061961861761661561461361261

US$/oz

End-07.Q1Gold Price($661.75)

MillionOunces

Net deltaoptions hedge

Delta adjusted global hedge book

Source: GFMS

8

Received Prices in Q1

The most important event relating to the sharp

decline in the options book was Gold Fields’

buy-back of the Western Areas hedge associated

with the South Deep mine in South Africa (see

Company Activity Section for more details).

Describing the decline recorded in the options

book in more detail, the net call delta hedge

declined quarter-on-quarter by 0.67 Moz (21 t)

assisted by a 0.31 Moz (10 t) cut in the net put

delta hedge.

As in previous editions of the Global Hedge Book

Analysis the profile of the delta hedge options

book in response to changes in the spot gold price

is illustrated on page 7. The accompanying risk

matrix adds a further level of detail to the sensitivity

of the profile with regards to step changes in the

underlying volatility.

Company ActivityBarrick, once again, made a significant contribution

to de-hedging in the quarter with a reported 2.0

Moz (62 t) reduction in their outstanding Corporate

Gold Sales Contracts achieved through deliveries

of gold production. The major also stated that

during April 2007 its remaining contract sales were

eliminated, roughly 0.5 Moz (16 t), which left the

group’s operating mines completely unhedged (9.5

Moz or 295 t of forward sales remain allocated

against future production from development

projects).

In South Africa substantial declines in outstanding

hedge commitments were reported by Gold Fields’

and AngloGold Ashanti. The former closed out the

Western Areas delta hedge of 1.09 Moz

(34 t) during the quarter although the actual

physical market impact of the deal was limited

to 816,000 ounces (25 t) as Gold Fields had

accumulated a 275,000 ounce (9 t) long position in

December 2006. AngloGold Ashanti, meanwhile,

reported a quarter-on-quarter decline in their total

net delta hedge of 570,000 ounces (18 t). In terms

of instruments, the decline was driven by a 19%

cut in forward sales, which equated to a reduction

of around 740,000 ounces (23 t). A modest 3%

increase in the delta hedge net options position

partly offset the aforementioned reduction in

forwards.

The last of the four significant hedging events

during the March quarter was Buenaventura’s

announcement on 9th March 2007 that it had

bought back 25%, or 483,000 ounces (15 t), of

its outstanding hedge position. The buy-back,

in addition to the three hefty reductions outlined

above, accounted for close to 90% of gross de-

hedging during the period.

(delta-adjusted, spot basis) % of decline Company gross decline (Moz)

Barrick Gold 45% 2.00

Gold Fields 18% 0.82

AngloGold Ashanti 13% 0.57

Buenaventura 12% 0.52

Newcrest 5% 0.22

Resolute Mining 2% 0.10

Note: Delta-adjusted volumes are calculated on the basis of published company data. As such disclosures are not exhaustive, the GFMS calculated position may not exactly correspond to the delta position reported by the company. In addition, GFMS value the contracts on a spot delta basis, whereas some companies report positions on a forward delta basis. This can lead to minor discrepancies between the calculated and reported delta-adjusted volumes. Where published data was unavailable, an estimate based on the scheduled expiry of contracts has been made.

Top De-hedgers in Q1

0 20 40 60 80 100200

300

400

500

600

700

RealisedPrices(US$/oz)

Q1 2007 Realised Prices

Cumulative production (%)

200

700 07.Q1 Average Price($649.82/oz)

0 20 40 60 80 100200

300

400

500

600

700

06.Q4 Realised Prices(avg. $561/oz)

07.Q1 Realised Prices(avg. $578/oz)

Source: GFMS

9

More modest contributions originated from

Newcrest, Resolute and Lihir Gold, although the

latter, as covered in the outlook section below,

has already made a significant contribution to

de-hedging in the second quarter of the year.

Meanwhile, having completed a book restructure

in the December quarter, de-hedging volumes at

Newcrest were accordingly lower.

Fresh hedging during the quarter was limited to

a handful of project related positions, the largest

being Etruscan Resources’ price protection

programme put in place against future production

at the Youga gold mine. The zero cost collar

structure consisted of 456,102 ounces (14 t) of

purchased puts (100% of forecast mine production

over the first five year of production) funded by the

issue of call options covering 246,296 ounces (8 t),

amounting to roughly 54% of annual output capped

at $700/oz. Commissioning of the operation is

currently scheduled to commence during June

2007.

In January 2007, View Resources completed the

hedge programme it had initiated in November

2006 (through the purchase of 150,000 ounces

or 5 t of put options), with the commitment of

175,000 ounces (5 t) of forward sales. St Barbara

Mines, meanwhile, purchased put options covering

220,000 ounces (7 t) to “protect future cash flows

at Gwalia Deeps”, a development project expected

to generate around 100,000 ounces (3 t) of gold

per annum from the second half of 2008 building

up to an annual rate of 200,000 ounces (6.2 t) in

the following year.

Lastly, at the end of March, Lafayette re-scheduled

its gold commitments for a period of three months

as a result of lower than planned production levels

due to the suspension of operations in November

2006 in the wake of the ‘Super-typhoon Reming’.

Following the disruption, full scale commissioning

of the plant resumed on 9th February 2007.

Producers’ weighted average received price

for gold sales amounted to $578/oz, a 3%

improvement quarter-on-quarter, compared to a

6% gain in the average spot price. Realised prices

were roughly $72/oz lower than the average spot

price for the three-month period, compared to a

$52/oz shortfall in the three months to December.

The relative deterioration was partly explained by

a drop in the received price reported by Barrick,

a consequence of the major’s delivery of mine

production into lower priced forward contracts

rather than spot sales.

Global Hedge Book Marked-to-Market

-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

Q4-06Q4-05Q4-04Q4-03Q4-02

300

400

500

600

700

US$billion U

S$/ozGold Price

(end period)

Marked-to-Market

Source: Company Reports, GFMS

Delivery Profile End-Q1 (base case, delta-adjusted)01

2

3

4

5

6

7

8

9

10

MillionOunces

Options

Forwards

End-Dec 2006 End-March 2007

0

1

2

3

4

5

6

7

8

9

10

2010200920082007

Source: GFMS

10

Despite the rise in the spot price used to value

hedge books, the marked-to-market for the

comparable set of producers where data was

available registered a modest improvement from

the December quarter to a negative $9.7 billion.

OutlookWith regards to the remainder of the year, both

Barrick and Lihir Gold, as highlighted above,

reported further hedge book reductions in the June

quarter. The former reported that it had removed

the remaining 0.5 Moz (16 t) of its Corporate Gold

Sales Contracts to leave itself unhedged in the

near term, while Lihir announced on 23rd April that

they had raised A$972 million in new funds with a

view to close out the gold hedge book and repay

the gold loan and other secured debt. At end

March Lihir’s delta hedge amounted to 1.42 Moz

(44 t).

A further more modest contribution to de-hedging

in the June quarter was provided by Oxiana who

following the successful acquisition of Agincourt

in April closed out the latter’s outstanding forward

sales of 69,293 ounces (2 t). More recently,

DRDGOLD reported on 16th May that it had closed

out Emperor Gold’s forward contracts of 145,695

ounces (5 t).

De-hedging in the June quarter is expected

to range between 2.5 to 3.5 Moz (62 – 93 t).

Thereafter, activity should be more subdued, with

de-hedging rates anticipated to fall closer to the

run rate of around 1.0 Moz (31 t) per quarter, which

would suggest full year de-hedging in the range of

8.0 to 10.0 Moz (249 – 311 t).

The delivery profile of the delta-adjusted global

hedge book, based on reported contract maturity

dates, is illustrated in the chart on page 9. The

maturity ladder as at end-December has been

charted alongside the profile at end-March to

illustrate the impact of the buy-backs enacted

during the period. (The charted profiles do not

take into account the impact of buy-backs, book

restructures, new hedging or the effect of changes

in the gold price used to value the option book, and

as such can only offer a guide to expected levels of

de-hedging.)

11

Technical Annex

The GFMS analysis utilises the Brady TrinityTM Risk Management and Trading system. Each mining company’s individual trades have been input to the Brady TrinityTM system.

The use of the Brady TrinityTM system is particularly relevant for the analysis of mining companies’ options positions. We have entered each option trade by mid-year of expiry. Moreover, non-vanilla products such as convertible forwards have been broken down into their constituent options. This analysis enables us to accurately obtain key parameters and valuations for each instrument used by each company and subsequently for the global hedge book as a whole. This methodology also allows us to model the delivery profile of the hedge book. All forward contracts, including spot deferred, floating rate forwards and fixed rate forwards, are input as forward sales. Options contracts, including cap and floor agreements, are entered as their constituent vanilla put and call contracts. Convertible and contingent options are unbundled into their constituent barrier options contracts. Trigger levels for barrier options are taken as the mid-point of published ranges, where available. Convertible forward contracts are modelled as a barrier call option combined with a vanilla put option.

In terms of the GFMS analysis, the key parameter of interest is the delta-adjusted position. As explained in the glossary, the delta of an option (or indeed of a forward) is the rate of change in the value of the derivative for a change in the price of the underlying. In the case of a gold forward sale (or purchase), the forward delta is 1, whilst in the case of an option, this delta is derived from the Black-Scholes option pricing formula.

The counterparties to mining companies’ hedging activity (typically banks) will dynamically hedge their exposure through delta hedging. For example, suppose a mining company purchases a put option. The writer of the option (a bank) will be long the delta volume. In other words, if the delta of the option is +0.5 and the nominal volume of the trade is 100,000 ounces, the delta volume will be 50,000 ounces (of which the bank will be long). To hedge this exposure, the bank must therefore undertake a transaction that yields an equal and opposite position (i.e. short). This will typically be achieved by the bank borrowing gold (normally from a central bank) and selling this into the spot market. Through this mechanism, mining companies’ hedging activities impact directly on the spot gold market.

It should be borne in mind that the value of an option, as well as the delta, will change in response to movements in key parameters, particularly the spot gold price, but also market volatility, interest rates and time to expiry. In response to this, banks will continuously or dynamically adjust their delta hedge position.

12

Glossary

Option - An option contract gives the holder the right, but not the obligation, to buy or sell gold at a predetermined price on or by an agreed date.

European Option - An option that can only be exercised at the expiry date.

American Option - An option that can be exercised at any time prior to the expiry date.

Put Option - An option contract which gives the buyer the right, but not the obligation, to sell a specified amount of gold (or other asset) at a predetermined price (the strike price) on or before a specified date (expiry date).

Call Option - An option contract which gives the buyer the right but not the obligation to buy a specified amount of gold (or other asset) at a predetermined price on or before the expiry date.

Barrier Option - An option whose outcome depends on the performance of the price of the underlying during the life of the option and whether that price breeches a predetermined barrier.

Forward - A transaction in which two parties agree to the purchase and sale of gold at a future date.

Gold Lease Rate - The cost of borrowing or return form lending gold, the daily level of which reflects the supply and demand for metal in the lending market.

Writer - The writer or grantor is the party who sells the option and receives that premium income.

Long - A position in an asset (e.g. gold) for which the value will rise should the price of that asset rise.

Short - A position in an asset (e.g. gold) for which the value will fall should the price of that asset rise.

Delta - The rate of change of the price of a derivative with the price of the underlying asset.

Gamma - The rate of change of delta with respect to the asset price.

Theta - The rate of change of the price of a derivative with the passage of time.

Vega - The rate of change of the price of a derivative with volatility.

Rho - The rate of change of the price of a derivative with the interest rate.

Greeks - The basket term for the above hedge parameters (delta, theta, vega, gamma, rho).

Underlying - Shortened term for the underlying commodity on which forwards and options are traded (i.e. in this case gold).

Delta Hedging - A hedging scheme that is designed to make the value of a derivatives portfolio insensitive to small changes in the price of the underlying.

Black-Scholes Model - A model for pricing European options. Developed by Fischer Black, Myron Scholes and Robert Merton. See F. Black and M. Scholes “The Pricing of Options and Corporate Liabilities” Journal of Political Economy 81, 1973 and R.C. Merton “Theory of Rational Pricing” Bell Journal of Economics and Management Science 4, 1973.

Vanilla/Non-Vanilla - Vanilla options are simple put and call options, whilst non-vanilla options are more complex, with pay-offs dependant on a variety of market factors, such as price paths or the price of alternative assets.

Volatility - A measure of the uncertainty or rate of change of an asset price.

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About GFMSwww.gfms.co.ukGFMS Ltd, the world’s foremost precious metals consultancy, specialising in research into the global gold, silver, platinum and palladium markets. GFMS is based in London, UK, but has representation in Australia, India, Russia, Germany, Spain and China, and a vast range of contacts and associates across the world.

GFMS is credited with producing the most authoritative surveys of the gold and silver markets, the annual Gold Survey and World Silver Survey, and produces a range of other publications dealing with all aspects of the precious metals markets. GFMS also provides consultancy services in the form of tailor-made research into selected areas of the precious metals markets. GFMS’ research team of fifteen full-time analysts comprise experienced economists and three geologists.

About Brady plcwww.bradytrinity.comBrady is a Software Solution provider whose main product, Trinity, is targeted towards Corporate Treasury in the Metals and Mining Industry. Trinity specialises in Physical Material Management, Financial Transaction Management, Treasury, Risk & Contract Management. Brady is acknowledged as the leading provider of Trading and Risk Management Software for the global metals marketplace, installed with producers, fabricators, merchants, banks and brokers around the globe. Headquarters are based on Cambridge Science Park in the UK. Brady floated on AIM in 2004.

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