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American Barrick

In: Business and Management

Submitted By anonymousaditya
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American Barrick Resources Corporation
Managing Gold Price Risk

Gold

Demand Supply
1. Jewelry (80%) 1. Expanding Production
2. Commercial and Soviet Union
Industrial use South Africa
3. Back-up for currencies North America Australia 2. Central Banks Liquidation

Factors that may increase gold price:
1. Large government deficits
2. Financial and economic crisis
3. Wars and doomsday scenarios
4. Increase in gold jewelry demand ?
5. Commercial and Industrial demand ?

Factors that may decrease gold price:
1. Financial and economic stability
2. Trends towards democracy and free markets
3. Effective use of monetary policy by central banks
4. Liquidation by central banks

Long-term trend?

Should Gold Producers Hedge Gold Price Risk?

Pros Cons

1. Protect downside 1. Sacrifice Upside
2. Share price premium? 2. Unsystematic risk?
3. Specialize in gold production 3.Share price penalty? not gold risk taking
4. High operating leverage and high sunk costs
5. Limited ability to adjust production
6. Lock-in the low total costs (see exhibit 3)

Managing Gold Price Risk – The Evolution

1. Gold Financing
Barrick-Cullaton Gold Trust
Bullion loans (denominated in gold – e.g., to finance Goldstrike mine)
Gold-indexed Eurobond offerings The main disadvantage
Conservative financial policy limits the amount of loans
(see exhibit 3)
Interest cost is only a small portion of total costs

2. Forward Sales
Normal forward contract
FT = S (1 + i)T

Gold forward contract
FT = S (1 + i - g)T = S (1 + c)T

where c = i - g c = contango rate i = dollar interest rate g = gold lease rate

The main disadvantages
1. Sacrifices the upside
2. Quantity produced...

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