Oceana Gold's plan to raise $106 million to buy out all its forward hedge contracts and sell 100% of its gold at present buoyant global spot price markets carries areas of risk.
However, investors appear to have settled into the idea, since the announcement late last week, and Oceana shares had retraced 10% losses to trade up 7% at around $3.05 yesterday.
Oceana announced last week it wants to raise $US75 million to buy out its forward hedge contracts, meaning it will sell gold on the global spot market, as opposed to contracting to sell some its production in the future - a tactic already undertaken by some major Australian gold producers.
By going unhedged, Oceana is betting it can make more on the buoyant daily spot market, but it forgoes having any back-up should spot prices take a major tumble.
Craigs Investment Partners broker Peter McIntyre said the initial decline then retracing of Oceana's share value indicates "there are plenty of believers [investors] in the market" who support Oceana's assumption that being 100% unhedged to sell into the spot gold market "is the place to be".
Mr McIntyre said maintaining a hedge book meant gold companies had the ability to minimise losses in lean years.
The mine life of Oceana's East Otago Macraes site, of about 14 to 16 years, and the company needing cash to restart its mothballed northern Philippines gold/copper development, would have prompted it to consider "making the most" in financial terms from its remaining resource in Otago.
He said two of Australia's largest gold miners, Newcrest and Lihir, had similarly "closed out" their respective hedge books, Newcrest in July 2007 and Lihir in July 2009, "but this by no means guarantees share price improvement".
"If anything, it makes the share price more volatile to changes in the spot price - both up and down," Mr McIntyre said.
Oceana's shares have come off a share slump of 20c a year ago to trade beyond $3 in mid-February this year.
Mr McIntyre said that during the past 12 months Newcrest shares had been as high $A39.75 and as low as $A27.61, while Lihir had traded in a range from $A3.77 to $A2.41.
Forsyth Barr broker Peter Young said when Oceana considered going unhedged it had to weigh up "the flip side", that if the spot price retreated, Oceana could "come unstuck" by not being covered by any hedge contracts.
"Obviously, it will be very good for [Oceana's] bottom line if the [spot] gold price continues to appreciate and they can sell into rising prices," he said yesterday.
