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Agenda
Major Product :
GOLD
Product Usage :
Previously it was used as currency, now
as currency back-up Jewelry (major part, about 80% of current use) Industrial Usage
Exploration
Exploration Drilling
Blasting
Underground Mining
Heap leaching
Milling
Oxidization
Leaching
Stripping
Electro-winning
Smelting
Gold Bullion
Refining
Reclamation
Cost Structure
Major cost comes from the exploration and exploitation /acquisition activities Virtually no marketing and distribution cost (market always ready to absorb their product in market prices) Competitive advantage of a company compared to the others coming from its efficiency in exploration and acquisition cost Highest risk exposure coming from the fluctuation of gold market price
*) www.goldprice.org
*) www.goldprice.org
Company Overview
Entered Gold Mining Business in 1983 Largest Gold-mining company in the world (after acquisition of Placer-Dome in 2006), HQ in Toronto, Canada, with 4 Regional Business Unit in Australia, Africa, North America and South America *) Growth from 1984 to 1992: Market capitalization : from $64 M to $5 B Annual production : from 34K Ounces to 1.325M Ounces As of December 2008 : annual production 7.7M Ounces, Proven and probable gold reserves : 138.5M Ounces
*) www.wikipedia.org
Managing Gold Price Risk: The Hedging Philosophy: Creates stable, predictable returns regardless of short-term market conditions. De-linking Barrick's earnings from the volatility in the spot gold market. Creates additional cash reserves that can be used to acquire new assets to generate new earnings.
Hedge Position
In 2000s the hedged portion is consistently reduced due to the trend of increasing gold prices
Gold Financing
Used to finance the new acquisition (1983-1987) Methods of Gold Financing: Issuing Gold-Trust (It raised $17 millions) The Gold-trust paid the investors 3% of mines output if gold price <= $399 /ounces, rising to 10% if gold price = $1,000 /ounces Bullion Loan : Barrick received gold from the lender-bank which it immediately sold to the market to get cash. Then Barrick repay the loan in monthly installments in ounces of gold with the interest rate of about 2% per year. Issuing Gold-indexed securities
Forward Sales/Contract
The forward sale is a commitment by the producer to deliver a fix amount of gold to the contract counterparty at a time in the future at a fixed price. The forward price of the contract is based on the spot price on the date of the contract plus a premium (contango). The contango is the difference between the interest rates for lending Dollar less the gold lease rate. The forward sale eliminates downside risk exposure, but the company lost the opportunity to sell at higher price
Options
Options is the right to choose whether to sell or to buy at a given price
Barrick bought Put Options and sold Call Options to execute a Collar Strategy. This allowed Barrick to benefit from price increases between put option price and call option price . This protected Barrick from price drops without initial cash outlay (it used the premium received from selling the Call Options to buy the Put Options)
$ Payoff
Call
CONCLUSION
The Hedging reduces the risk exposure due to the price drop, at the same time it prevent the company to benefit from price increase The hedging methods, related to the contracted price, time horizon and how many percent the gold production shall be hedged, must be evaluate from time to time in order to get the maximum value for the company
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