American Barrick Resources Corp Managing Gold Price Risk Case Solution

Case Solution

Managing the risk of changing prices of gold is a vital business manner of American Barrick Resources Corp., among North America's greatest and lots of effective gold-mining firms. The case contrasts this firm's acquiring recommendations with people of the rivals that do not hedge and particulars the amount of acquiring products (gold financial financial loans, forwards, options, place deferred contracts) familiar with manage price risk. In 1992 the treatments for American Barrick is astonished by not-predicted new gold finds, however, this new production places demands round the firm's acquiring program and tests the firm's persistence for acquiring when prices of gold in addition to many acquiring automobiles are unattractive.

Excel Calculations

Cashflow Statement (in thousands of dollars)

Cash from operations

Cash from investment activities

Cash from financing

Cost per Ounce

Sensitivity

Dividend to Income

Present Value (1992)

Share Value

Number of Outstanding Shares

Gold Rate per Ounce

ABX Cost of Capital

Gold Reserves

Gold Production

Gold Reserves

ABX Beta

Market Return (1992)

Risk Free Return (1992)

Cost of Capital ABX

Questions Covered

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?

2. What is the stated intent of ABX’s hedging program? What should be the goal of a gold mine’s price risk management program?

3. What would convince you that a price risk management program created value for its shareholders ex ante?

4. How would you characterize the evolution of Barrick’s price risk management activities? Are they consistent with the stated policy goals?

5. How should a gold mine which wants to moderate its gold price risk compare strategies (using futures, forwards, gold loans, or spot deferred contracts) with insurance strategies (using options)? On what basis should these decisions be made? Once a firm has decided on either a hedging or an insurance strategy, how should it choose from among specific alternatives?

6. What is a “spot deferred contract?” Is it an option? a forward contract? Why has ABX chosen to rely on spot deferred contracts relative to other gold derivatives?