Harvard Business School
Rev. October 6, 1995
American Barrick Resources Corporation:
Managing Gold Price Risk
During 1992 the financial team of Toronto-based American Barrick Resources Corporation, one of the world’s fastest growing and most financially successful gold-mining concerns, met regularly to review strategic and tactical issues related to managing the firm’s exposure to gold price risk. Many major gold mines prided themselves on hedging none of the price risk of their output. If unhedged, a gold mine’s sole output, and hence its profits, cash flows, and stock price, were tied to gyrations in the price of gold. However, American Barrick had in place a gold-hedging program that was an integral and much publicized part of the firm’s corporate strategy. In an environment of falling gold prices, the firm’s hedge position had allowed it to profit handsomely and to sell its commodity output at prices well above market rates. For example, in 1992, American Barrick produced and sold over 1,280,000 ounces of gold at an average price of $422 per ounce, while the market price was about $345 per ounce.1
American Barrick’s gold-hedging program, and indeed all the corporate finance and treasury functions of the $4 billion market capitalization enterprise, were managed by a trio of relatively young but experienced financial executives: Gregory Wilkins (executive vice president and chief financial officer), Robert Wickham (vice president, finance), and Randall Oliphant (treasurer). Messrs. Wickham and Oliphant were responsible for the day-to-day management of American Barrick’s highly regarded hedging program, and they reported to and worked closely with Mr. Wilkins. Gregory Wilkins and Robert Wickham had been with the firm since its startup, and Randall Oliphant had joined the firm in 1987.
The gold-hedging program was a distinguishing and permanent characteristic of the firm’s strategy, and there was no discussion of abandoning the activity. Nevertheless, the implementation of the hedging program raised a number of issues, and American Barrick’s latest gold find, the Meikle Mine, naturally brought to the forefront questions of when, how much, and how to hedge its gold production. The recently announced Meikle Mine Development Project required capital investments exceeding $180 million and was projected to yield 400,000 ounces of gold annually for 11 years beginning in 1996.
1 All figures in this case are expressed in U.S. dollars unless otherwise noted.
In addition, the processing of unexpectedly rich ore bodies would increase production to a level much higher than was anticipated. While this development was good news, the firm’s output would then be hedged far less than planned. Putting on a new hedge position in an environment of
This case was prepared by Professor Peter Tufano and Research Associate Jon Serbin for the purpose of class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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American Barrick Resources Corporation
low gold prices and low interest rates challenged the finance team’s ingenuity and commitment to its hedging program.
American Barrick Resources Corporation
Peter Munk, a successful Canadian entrepreneur and financier, was the chairman, chief executive officer, and founder of American Barrick. Although he had had no prior experience in the...
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