Case Study : American Barrick

Good Essays
In the absence of hedging program using financial instruments, how sensitive would Barrick earnings and cash flows 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?
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 $345 per ounce. If there is no hedging program, American Barrick needs to sell the gold at price $345 per ounce. Hence, the net income and cash flow from operation will be declined to $97.5 million and $205.4 million respectively. (See table I)

Table I: The comparison between the American Barrick Performance under hedging and no hedging

[pic]

Considering on the market without hedging program, when the price of gold changed 1 percent, the net income and cash flow from operation will be changed 3.56 percent and 1.69 percent, respectively. The net income also caused the changed in shareholder’s book value, 0.35 percent change according to 1 percent change in gold price. Therefore, if the gold price increased, it would increase the net income and shareholder’s book value. The stock will be more attractive to the investors and drive the stock price increasing. By contrary, if the gold price decreased, the shareholder’s book value would be decreased and the stock price would be decreased, also. (See table II)

Table II: The effect on 1% change in gold price

[pic]

There are a lot of exposures on the gold price such as the political instability, inflation, government policy and new findings in gold mines. If there are no financial contracts such as option, forward or insurance, the firm might need to tighten the financial policies to be more conservative. In addition, the firm should improve the innovative financing techniques and instruments to prevent the financial risk. Moreover, the firm might need to consider

You May Also Find These Documents Helpful

  • Good Essays

    Case WriteupCase study 2: American Barrick Resources Corporation FNCE 6909 – Corporate Risk Management Due November 1, 2012 Presented By: Justin Merow on November 11, 2012 Executive Summary The following case study reports on a highly successful gold mining company, American Barrick Resource Corporation. We discuss herein the many of the techniques being used in their hedging programs and the variation between such programs. The company itself was founded by a gentleman named Peter Munk…

    • 2076 Words
    • 9 Pages
    Good Essays
  • Powerful Essays

    American Barrick Resources Corporation Case a. Explain the value chain for gold mining firms (how can a mine create a competitive advantage relative to its rivals). What are the factors that may explain exceptional performance of ABX relative to the other gold mines? To create a competitive advantage, a mine has to properly manage its exposure to gold price fluctuations. This is not an easy thing to do since there are so many factors to consider: when, how much, and how to hedge the gold…

    • 1340 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Barrick Gold Case study

    • 547 Words
    • 3 Pages

    The purpose of this case analysis is to describe the communication problem and the resulting symptoms that are occurring with Barrick Gold Mine Company happening at the peak of Andes range, the Pascua-Lama development, and the concerns of its stakeholders. As an ending to this case analysis there shall be a solution provided on how the massive gold mine company can solve the disputes with its stakeholder groups. The main communication problem that Barrick is facing is caused by their own hand,…

    • 547 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    off, the finance team of the company have to make sure they can sell the gold to a reasonable price higher than mining cost .This price depends on the market and therefore present a major risk for mining firms that can be hedge. Hedging is part American Barrick program and is the primary reason why it outperformed rivals in the…

    • 2789 Words
    • 11 Pages
    Powerful Essays
  • Good Essays

    Barrick Gold

    • 1173 Words
    • 5 Pages

    B. 1. One organization that I feel has the best longterm position in terms of their stock market price is Barrick Gold. http://finance.yahoo.com/q/bs?s=ABX+Balance+Sheet&annual http://www.barrick.com/investors/annual-report/financial-highlights/default.aspx The most important factor in any organization from what I learnt is how much it can pay its shareholders in dividends. Barrick gold has increased per year their annualized dividend US cents per share from 48 cents per share in 2010 to 60…

    • 1173 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    African Barrick Gold

    • 1868 Words
    • 8 Pages

    Interim Individual Share Portfolio Review REPORT STUDENT : ILINCA CRISTIAN DANIEL 1317370 AFRICAN BARRICK GOLD Shares Report Motivation of investment The reason of investing 10,000 pounds in a company of exploiting natural resources, gold, it is a decision for the future . This can…

    • 1868 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    DERIVATIVE CASES CASE STUDY II AMERICAN BARRICK RESOURCES CORPORATION: MANAGING GOLD PRICE RISK Group II - Cohort 5 American Barrick is the largest gold producer in North America. The implementation of the gold-hedging program differentiated the firm from other major gold rivals and improved its reserve and financial strength. In 1995, American Barrick ’s latest…

    • 1511 Words
    • 7 Pages
    Good Essays
  • Best Essays

    Barrick Gold Corporation

    • 3105 Words
    • 9 Pages

    1. What are the challenges faced by extractive mining corporations in their attempt to establish subsidiary operations in developing nations As major multinational extractive mining corporations continue to expand their developing country footprints, they are finding challenges in carrying out corporate social responsibility (CSR) to achieve a sustainable balance of benefits for business, its employees, stakeholders and the communities in which they attempt to establish subsidiary operations. In…

    • 3105 Words
    • 9 Pages
    Best Essays
  • Good Essays

    Derivative Cases Case 2 American Barrick Resources Corporation: Managing Gold Price Risk 1. Hedging Motivation In terms of the gold mines owners, they hedge nothing against the price drop risk of gold output. As the profits, cash flows and stock price were tied of gyrations in the price of gold. As to the gold, there was always a ready market for their product, at market prices, once extracted from the earth and refined. Hedging against the risks can protect the downside of gold price, enable…

    • 1684 Words
    • 7 Pages
    Good Essays
  • Powerful Essays

    Barrick Gold Field Report

    • 1350 Words
    • 6 Pages

    Barrick Gold’s Impact in the Dominican Republic’s Society and Economy Monica Sido Hawli Universidad Iberoamericana Abstract This paper studies the impact of the mining company Barrick Gold in their Pueblo Viejo Project located in Cotuí, Dominican Republic. Many studies have been done to the actions of this company around the world, but this paper examines the situation of their project in the Dominican Republic and the effects that has caused…

    • 1350 Words
    • 6 Pages
    Powerful Essays