American Barrick Resources Corporation
Essay by wends825 • February 22, 2013 • Essay • 322 Words (2 Pages) • 1,845 Views
FINMA 4 WAC - American Barrick Resources Corporation
Wendy Ang
Yola Genuino
American Barrick Resources Corporation is engaged in the production and sale of gold, as well as related activities, such as exploration and mine development. American Barrick have been hedging extensively their gold production. Gold mining is a very homogeneous industry group, with high exposure fluctuations in gold prices. In addition, it does not offer much scope for vertical integration and diversification, unlike the oil and gas industry.
Managing the risk of changing prices of gold is central to the business strategy of American Barrick Resources Corp., one of North America's largest and most successful gold-mining firms. The case contrasts this firm's hedging policies with those of its rivals that do not hedge and details the wide range of hedging products (gold loans, forwards, options, spot deferred contracts) used to manage price risk. In 1992, the management of American Barrick was pleasantly surprised by unexpected new gold finds, but the new production places demands on the firm's hedging program and tests the firm's commitment to hedging when prices of gold and of many hedging vehicles are unattractive.
Objectives of Risk Management
* Protect the portfolio on the downside and to pick up the high premiums in the options market due to that same market volatility
* Separate stock price based on company's performance and Gold price performance
* Manage cash flow more effectively
* Preserve value
* Fully protected against price declines for 3 years output, 20-25% for next decade.
Forwards vs. Option
* why hedge: because the Central bank said that Gold is no longer playing central role in the world economy but you want to be able to plan for your cash flow
Investors are betting on operational efficiency
As producer of commodity goods, mining firms do not have marketing and distribution in their cost component, therefore, their competitive advantage lies in the cost of gold production, features of the gold deposit and the company's efficiency in operations
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