Resesarch Essay

2138 Words Jan 11th, 2012 9 Pages
CASE: American Barrick Resources Corporation : Managing Gold Price Risk
1. In the absence of a hedging program using financial instruments, how sensitive would Barrick stock 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?

Particulars for yr 1992($ million) | | Pretax earnings (Exhibit 2) | 223 | Reductions in earning of gold sold at spot (1280mn oz x (422-345) (Exhibit 12) | (99) | Proforma Pretax Earnings | 124 | Taxes @ 21% (Exhibit 2) | (26) | After Tax Earnings | 98 |

Thus in absence of risk management program the American Barrick stock would be more sensitive to gold price
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Being conservative in nature, company has maintained lower leverage. As per stated policy goals of company, Gold Hedging program gives American Barrick extraordinary financial stability. It protects shareholder’s wealth from the dip in gold prices. American Barrick’s hedging program evolved over history and used a wide range of tools to manage gold price risk. With gold financing, forward sales, options strategies & spot deferred contracts, company shed some of its price risk while maintaining flexibility to profit from rising gold prices.

a. Gold Financing:

In early days, Company’s gold price management activities were incorporated in financing for its mines. Company made its growth organically as well as inorganically. Almost every year, company madeacquisition of 1 gold mine company. For financing such acquisition, company used following tools

Gold Trust: Paying specific percentage of gold production as return to investors

Bullion Loan: Bank gives loan in gold form, company need to pay interest in gold terms only. Collateral is reserves company owns

Limitations: Limited scope.

b. Forward Sales:

Production at Gold mine is highly inelastic in nature. ie Its not easy for the company to change the production in tune with the highly fluctuating demand, market prices. To avoid price risk, American Barricks used Forward Sales as tool by which company can lock in prices for future dates. Forward Sales are

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