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2 February 2017
Copper Miners Urged to Hedge Output as Price Recovers (Correct)

Copper miners should consider hedging a percentage of production to lock in prices that are trading near their highest level in 18 months, said Atanas Djumaliev, head of global commodities at VTB Capital.

A rebound in copper prices is likely to spur new investments in supply this year, and producers should reduce the risk of spending on expansions by entering hedging contracts, Djumaliev said by phone from Moscow.

Lenders, who watched some miners come close to breaching debt covenants after prices fell about 40 percent during 2013-2015, are increasingly keen to see protections put in place, especially before signing off on funds for new projects, he said. Hedges can be a controversial topic among miners, as while they provide certainty and prevent losses when metal prices fall, the contracts can also mean producers don’t benefit fully from gains in the market.

“Hedging is a medicine,” said Djumaliev, who joined VTB Capital from Goldman Sachs Group Inc. in 2015. “If you take too much you can get ill, but if you don’t take enough, you can get ill as well. You just have to take the right amount.”

VTB Capital helped some mining clients to lock in gold prices above $1,300 an ounce last year, $100 above today’s spot prices, and is working with copper miners to put in place hedges on a slice of their output for up to two years, he said, without naming the companies.

Some producers have already taken the plunge. First Quantum Minerals Ltd., which warned early last year that its future as a going concern was in doubt as prices slumped, hedged 500,000 metric tons of copper in 2016, more than 90 percent of its output for the year. Capstone Mining Corp. put hedges in place in March to avoid breaching debt covenants.

Nearly a year on, miners may feel they’re in a safer place.

Copper traded at $5,950 a ton on the London Metal Exchange on Thursday, holding near its highest level since June 2015 as strikes loom at Escondida, the world’s largest copper mine.

VTB has expanded quickly in a business that many rivals have turned their back on. European banks including Credit Suisse Group AG and Deutsche Bank AG have sold commodities trading units amid efforts to shore up capital reserves, while U.S. lenders including Goldman Sachs and JPMorgan Chase & Co.

scaled back as regulators and lawmakers probed their ownership of physical assets including power plants and metals warehouses.

VTB increased front-office headcount from 20 to 34 last year and has built up its trading book via offtake contracts in non-ferrous and precious metals markets. Among them is a deal with a major aluminum producer that helped to boost the bank’s aluminium trading volumes to 200,000 tons last year.

Corporate Communications VTB Capital