Futures Daily: Listed Companies Use Futures Tools to Make Hedging Efficient

Updated on: March 29, 2016

Reported by Huang Yan, Journalist from Futures Daily

Over the past year, demand for gold and commodities has been depressed and prices have continued to decline for the last two years, with global gold and mineral company operating under enormous pressure. Some gold enterprises use futures and other hedging tools to effectively circumvent the risk of falling prices of gold.

Last Saturday, a large domestic gold listed company -- Zijin Mining released 2015 annual report: in 2015, Zijin Mining realized sales revenue of 74.304 billion yuan, a year-on year increase of 26.45%; net profit attributable to shareholders of the listed company is 1.655 billion, a year-on year decrease of 29.40%.

Annual report also shows that during the reporting period, Zijin Mining investment income is about 1.313 billion yuan, a year-on year increase of 69.92%, mainly due to 2015 hedging of the product gains substantially. As of December 31, 2015, the company held the futures contract, gold lease spot goods and gold lease forward hedging, and realized a total of 1.202 billion yuan in floating income.

In view of this, Zijin Mining is able to lock production profit by hedging its products.

The company also said in the annual report, the company's revenue mainly comes from gold, copper, zinc and other metal products. If these products prices fall in the future, the company will increase benefit and decrease cost in multi-channels by measures of efficiency, increment, reducing cost and losses. At the same time the company will also improve market study and judge, circumvent risk of price fluctuations through a reasonable financial derivative.

Another gold listed company - Chifeng Gold said in its 2015 annual report, in a reporting period, the company took advantage of gold futures contract with its own capital to do hedging transactions on gold spot goods and part of the company gold lease positions. As of December 31, 2015, the company liquidated the futures positions on gold spot products according to the sales. As the lease of gold has not yet expired, it still holds some gold lease hedging positions.

As for the business plan in 2016, Chifeng Gold said in the annual report that the company will, through analysis and research of commodity price movements, use the modern financial instruments to carry out the commodity hedging business, take initiative to manage commodity price fluctuation risk, try to sell products at the expected price, reduce the negative impact of the commodity price fluctuations on corporate earnings.

Precious metal product listed company – Gangtai Holdings said in its 2015 annual report, since 2015 the company has formulated Precious Metal Hedging Business Management System. In the process of the business, the company strictly operates gold hedging in accordance with the operation process and quota in the system. The risk management department of the company also regularly checks and urges the department responsible for hedging business, to rectify in time if there is any problem. Since the company launched its gold business, it has stabilized the profit margin of the company through hedging transactions and prevented the risk of gold price fluctuation.

As far as we know, in 2015, Gangtai Holdings realizes the business income 8.845 billion yuan, including gold and gold ornaments sales revenue of 7.58 billion yuan, realizes net profit of 348 million yuan attributable to shareholders of listed companies, up 38.37% from 2014.

Besides using futures and other derivatives to stable production and operation, in recent years, some domestic gold enterprises don't forget to seize the development opportunity brought about by gold price downturn, layout overseas market actively, increase overseas project acquisition. It is reported that Zijin Mining completed the acquisition of Bogra gold mine and Camore copper mine in 2015, and participated in the additional rights issue of Ivanhoe company and Nkowi Platinum, and completed the delisting of Norton Kaneda.

Earlier, domestic companies, including China Gold Group and Zhaojin Gold Mining, also intend to acquire and merger overseas gold mines, and have made attempts to make the related acquisitions.

"Futures and other hedging instruments can help domestic gold and other mineral companies manage price risks and enhance their competitiveness." An insider said that more domestic companies will "go out" in the future, and enterprises should pay much attention to use hedge instruments such as futures to manage price volatility risks such as commodities and exchange rates.