Professional Documents
Culture Documents
The Gold Industry: Presented by
The Gold Industry: Presented by
Presented by:
Andreana Lu Yang Ivy Wai Ting Fung
Simon Wisniewski
Jeff dAvignon
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Sudden surge in demand or disruption in supply can lead backwardation, where the spot price is higher than the forward price The gold market is usually in contango, due to the smoothing of supply that is possible due to accessible stocks.
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Exploration
Exploration Drilling
Blasthole Drilling
Blasting
Underground Mining
Heap Leaching
Mining
Oxidization
Leaching
Stripping
Electro-winning
Smelting
Gold Bullion
Refining
Reclamation
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Market Capitalization:
35.87B 20.28B 13.73B 10.10B 7.76B 6.26B
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Revenue Composition
Sales of gold Sale of other base metals Gain on investment Gain on derivative instrument Gain on dividends, interest & foreign exchange income
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Risk Assessment
Three major market risks faced by firms in gold mining industries:
Commodity Price Risk Foreign Exchange Rate Risk Interest Rate Risk
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Significant decrease in interest rates and/or increase in gold lease rates can have a great negative impact on the price of the new gold sales contract and on the difference between the forward gold price & current spot price 20
Measurement of Risks
Methods vary across industries and firms within the same industry No specific requirements needed for gold mining companies In theory, should use delta calculation Delta: the change in the value of a portfolio with respect to a change in the price of the underlying asset (gold) Delta % : portfolio delta / amount of gold produced over 3 years
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Measurement of Risks
BUT:
Most gold mining companies do not use this delta calculation No mention of the volatility of spot gold prices Instead, they only briefly mention that a certain dollars per ounce change in the gold price would result in an increase or decrease in approximately how many dollars change in cash flow from operations and net income.
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Since gold is quoted and traded in US dollars, gold producers with operations and investment in a large number of countries outside U.S will be exposed to foreign exchange rate risks
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Interest rate risk is not viewed as important as the gold price risk and currency risk due to the low leverage in the gold mining industry
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Liquidity
Is important in determining how much funds a firm can provide in terms of emergencies With a large cash balance, firms will face fewer financial constraints and hardships So, they do less hedging as their risk management 28 strategies
Potential Hazards
Gold mining companies use different derivative instruments to hedge themselves against the risks that they face from potential future movement in market variables The main motives for hedging:
To cover the total operating costs Remove price risk Enhance revenue Control their cash flows
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Potential Hazard
BUT
No assurance that outcome of hedging will be better than the outcome without hedging Leave firms profit to be dependent solely on the underlying productive activities May suffer opportunity loss
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In order to develop an effective risk management program, a firm should make a clear statement about the firms risk management philosophy 32
Corporate Profile
Incorporated in 1921 Trades on NYSE, Australian and Toronto stock exchanges (NYSE & ASX: NEM; TSX: NMC) Newmont Mining Corporation is the worlds largest gold producer Has operations in US, Canada, Australia, Peru, Indonesia, Uzbekistan, Turkey, Bolivia, New Zealand and Mexico The only S&P 500 gold stock In addition to gold, also engages in the production and exploration of silver, copper and zinc Most of Newmonts revenues come from the sale of refined gold in the international market
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Newmont Properties
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Financials
Today: Can$ 53.730 52-Week High 61.950 EPS 1.36 P/E 39.50 52-Week Low 48.110
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Hedging Philosophy
With respect to gold, Newmonts philosophy is to remain largely unhedged and the corporation generally sells its gold production at market prices Historically, Newmont has, on a limited basis, entered into derivative contracts to protect the selling price for certain anticipated gold productions and to manage risks associated with:
Commodity price changes Foreign currency changes Interest rates changes
The hedging policy authorized by Newmonts Board of Directors limits total gold hedging activity to 16 million ounces
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Any drop in the price of gold adversely impacts Newmonts revenues, profits and cash flows, particularly in light of their unhedged philosophy Based on estimates of Newmonts stand-alone 2004 production and expenses, a $10-per-ounce change in the gold price would result in an increase or decrease of approximately $55 million in cash flow from operations and approximately $50 million in net income
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Use of Derivatives
Newmont had no gold forward sales contracts at December 31, 2003, although positions existed at December 31, 2002. Newmont had $11,758 million fair value of gold put option contracts outstanding at December 31, 2003 and $22,604 million back on December 31, 2002. Newmont had no gold convertible put option contracts and other instruments outstanding at December 31, 2003, although positions existed at December 31, 2002. Newmont had no gold sold convertible put option contracts outstanding at December 31, 2003, although a position did exist at December 31, 2002.
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The currencies that primarily impact Newmonts results of operations are the Australian and Canadian dollars
During 2003, both currencies strengthened by an average of 17% and 11%, respectively, against the U.S. dollar. This increased U.S. dollar reported operating costs in Australia and Canada by approximately $76.2 million and $7.6 million
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Foreign Currency
Newmont acquired certain cross currency swap contracts in the Normandy transaction intended to hedge the currency risk on repayment of US dollardenominated debt These contracts were closed out during the quarter ended June 30, 2002 for net proceeds of $50.8 million. The contracts were accounted for on a mark-to-market basis until closed out, resulting in a loss to income of $8.5 million for the period from February 15, 2002 through December 31, 2002 Newmont also acquired currency swap contracts to receive AUD and pay USD designated as hedges of AUD denominated debt. The contracts are accounted for on a mark-to-market basis with the change recorded in earnings
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Foreign Currency
To the extent that there are fluctuations in local currency exchange rates against the U.S. dollar, the devaluation of a local currency is generally economically neutral or beneficial to most operations since local salaries and supply contracts will decrease against the U.S. dollar based revenue stream The year ended December 31, 2003 included a foreign currency translation gain of $97.0 million amongst other things composed a $27.4 million mark-to-market gain on ineffective foreign currency swaps
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-8,500
-21,924 16,900 1,075
0
7,669 7,700 639
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Corporate Profile
Founded in 1983 when three small mining and oil and gas companies were merged as Barrick Resources Corp. Barrick Gold Corporation engages in the production and sale of gold, including related mining activities such as exploration, development, mining and processing. Shares are traded under the ticker symbol ABX on the Toronto, New York, London and Swiss stock 53 exchanges and the Paris Bourse.
Corporate Profile
Barrick Gold Corporation is among the worlds largest gold producers of market capitalization, gold production and reserves. North America's #2 gold producer behind Newmont Mining. Barrick's hedging practices, which have become its distinguishing feature, came under attack from investors in 2000, despite company estimates that it earned an additional $391 million through hedging in 54 1999 and another $300million in 2000.
Operates a low-cost portfolio of 12 mines and four major development projects on four continents : North America, South America, Africa and Australia The Companys development plan is expected to add four major new mines between 2005 and 2008. Together, these mines are projected to produce approximately 2 million plus ounces of gold annually
Operations
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Operations produced about 5 million ounces In 2004 the Companys 12 operating mines
of gold (5.51 in 2003), at a cash cost of $212 per ounce ($189 in 2003), the lowest cash cost of all senior producers.
For 2005, the Company expects gold production to be 5.4 to 5.5 million ounces at an average total cash cost of $220 to $230 per ounce. The Company increased its reserves by over 3 million ounces during 2004, with gold mineral reserves of 89 million ounces as at December 31.
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Financials
Public Company (NYSE: ABX; Toronto: ABX) Fiscal Year-End December 2004 Sales (mil.) 1-Year Sales Growth` 1,932.0 -5.1%
248.0
24.0% 7,100 4.4%
The industry's only A-rated balance sheet with no net debt. Rank #468 in FT Global 500 and included in the TSX 6057
Financials
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Financials : Performance
EPS 0.46 P/E 55.70
52-Week Low 18.040 Indicated
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Risk Exposures
Gold Price Risk Interest Rate Risk
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one of the more successful hedgers in the industry (the company estimates its hedging strategy has added more than $2 billion since the late 1980s) In 2003, Barrick implemented a no-hedge strategy the wake of rising gold prices - a significant departure from previous practice.
Financial risk management has given the Company the ability to grow reserves and production, allowing it to significantly increase its leverage to the gold price. Barrick has more than four out of every five ounces of reserves currently unhedged.
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to mitigate the effects of certain risks that are inherent in its business, and also to take advantage of opportunities to secure attractive pricing for commodities, currencies and interest rates. The inherent risks that Barrick most often attempts to mitigate by the use of derivative instruments occur from changes in commodity prices (gold and silver), interest rates and foreign currency exchange rates. Because Barrick produces gold and silver, incurs costs in foreign currencies, and invests and borrow in US dollars and is therefore subject to US interest rates, its derivative instruments cover natural underlying asset or liability positions. The purpose of the hedging elements of Barricks derivative program is so that changes in the values of cash flows from hedged items are offset by equivalent changes in the values of derivative instruments. Barrick does not hold derivatives for the purpose of speculation; its risk management programs are designed to enable Barrick to plan its business effectively and, where possible, mitigate adverse effects of future movements in gold and silver prices, interest rates and foreign currency exchange rates.
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Hedging Activities
The main types of derivatives Barrick uses are:
Hedging Activities
Barrick mainly use over-the-counter (OTC) derivative contracts. Using privately negotiated master trading agreements with its counterparties, Barrick is, in many cases, able to secure more favorable terms than if it used exchange-traded derivative instruments. Barrick has been able to negotiate these master trading agreements due to its credit standing and the quality and long-life nature of its mines and gold mineral reserves.
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Hedging Activities
Barrick values derivative instruments using pricing inputs that are readily available from independent sources. The fair value of the contracts is mainly affected by, among other things, changes in commodity prices, interest rates, gold lease rates and foreign currency exchange rates.
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Hedging Activities
Barrick use of these contracts is based on established practices and parameters, which are subject to the oversight of the Finance Committee of the Board of Directors. Barrick also maintain a separate compliance function to independently monitor its hedging and financial risk management activities and segregate the duties of personnel responsible for entering into transactions from those responsible for recording transactions. 66
Hedging Activities
Forward gold and silver sales contracts:
These contracts provide for the sale of future gold production in fixed quantities with delivery dates at our discretion over a period of up to 15 years.
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Hedging Activities
Interest rate swaps: These instruments are used to counteract the volatility of variable short-term interest rates by substituting fixed interest rates over longer terms on cash and short-term investments. Barrick also use interest rate swaps to swap our interest due on long-term debt obligations from fixed to floating, to take advantage of the present low interest-rate environment. 68
Hedging Activities
Foreign currency contracts: These instruments are used for the cash flows at Barricks operating mines and development projects from forecasted expenditures denominated in Canadian and Australian dollars to insulate them from currency fluctuations.
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Hedging Activities
Gold lease rate swap contracts: These contracts are used to manage the fixed gold lease rate element of fixedprice forward gold sales contracts and to take advantage of lower short-term gold lease rates.
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The End
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