American Barrick Resources Corporation:Managing Gold Price Risk

Case Study > American Barrick Resources Corporation:Managing Gold Price Risk

Georgia State University MRM 8620v American Barrick Resources Corporation: Managing Gold Price Risk Primary Teaching Objective This case is designed to give students a chance to observe the diversity of risk management options available for a firm to manage its exposure to financial risk. It also asks students to relate how the theoretical ...[Show More]

Georgia State University
MRM 8620v
American Barrick Resources Corporation: Managing Gold Price Risk

Primary Teaching Objective

This case is designed to give students a chance to observe the diversity of risk management

options available for a firm to manage its exposure to financial risk. It also asks students to relate

how the theoretical rationales for risk management are employed by practitioners.

Case Study Questions

1. Explain the value chain for gold mining firms, i.e., what activities the firm must perform, and,

for each, how a mine can create a competitive advantage relative to its rivals.

2. Considering the value chain for gold mining firms, how has ABX performed relative to its

rivals? What do you think are the reasons for its performance?

3. In the absence of a hedging program, estimate how sensitive Barrick's cash flows are to a one

percent change in gold prices. Specifically, estimate the percentage change in pro-forma

operating cash flow and pro-forma net income after taxes due to a one percent change in the price

of gold. Use the data provided in the Appendix to arrive at this result. Be sure to back out the

effects of any non-cash charges and any payoffs from derivatives activities.

4. Discuss ways Barrick could manage its gold price exposure without using financial derivative

contracts.

5. What is the stated intent of Barrick's hedging program? What should be the goal of the gold

mine's price risk management program? How can risk management add value at Barrick?

6. The case describes a number of strategies available to manage exposure to gold price risk. For

each strategy listed below, describe the goal of the strategy, the contracts that are used to

implement the strategy, the payoffs on the contracts (risk-profile diagrams), and the pros and cons

of each strategy.

A. Forward Contracts B. Collars C. Spot Deferred Contracts

7. Exhibit 4 in the case shows that Barrick has outperformed other major gold mine producers

during the time period in this case. Do you think the risk management program was a primary

contributor to their success? Or does ABX possess other assets or production technology that

allows them to outperform the industry? Can you find any evidence that risk management is

adding value in an ex ante sense at Barrick?