Essay on Case Study : American Barrick

1022 Words Jul 12th, 2010 5 Pages
In the absence of hedging program using financial instruments, how sensitive would Barrick earnings and cash flows be to gold price changes? For every 1% change in gold prices, how might its stock be affected? How could the firm manage its gold price exposure without the use of financial contracts?
In 1992, American Barrick produced and sold over 1,280,000 ounces of gold at an average price of $422 per ounce, while the market price was $345 per ounce. If there is no hedging program, American Barrick needs to sell the gold at price $345 per ounce. Hence, the net income and cash flow from operation will be declined to $97.5 million and $205.4 million respectively. (See table I)

Table I: The comparison between the American Barrick
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Moreover, the firm might be able to diversify away its gold price risk.

2. What is the stated intent of ABX’s hedging program?

For hedging program, American Barrick protects its glod price risk while maintaining flexibility to profit from rising gold prices. The stated intent of ABX’s hedging program is to ensuring that the company was protected against falls in the price of gold over the long term. In the short term, the strategy is to manage its positions to capitalize on its expectations of movements in the gold’s price. There are many tools to manage the gold price risk as follow. 1) Gold Financings 2) Forward Sales 3) Options and Warrants 4) Spot Deferred Contracts

Gold Financings : There are many ways to finance, for example, the company finance funds from issue equity or borrow the loan to acquire the other company to get more revenue.

Forward Sales : It is an agreement that a counterparty commits to deliver a specified quantity of gold at a specific date for the setting price at the beginning of the contracts. This tool is to protect the company against adverse price movements.

Options and Warrants : It is a tool that can mitigate the risk of price declines while allowing the firm to retain the benefit from the rising price. A collar is the strategy that buys put options and sells call option on gold. The exercise price of put is lower than call option, so the company can get premium.

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