American Barrick Resources Corporation Case Essay

a. Explain the value chain for luxurious mining warms (how squirt a mine create a competitive advantage sexual intercourse to its rivals). What are the factors that may explain exceptional performance of ABX relative to the some other florid mines?To create a competitive advantage, a mine has to aright manage its impression to currency expense fluctuations. This is not an easy involvement to do since there are so many factors to consider when, how much, and how to set back the gold production. Firms in this industry differentiate themselves based on the take chances management strategies they implement. Furthermore, mines should as well be able-bodied to minimize the speak to of gold production along with making large sunk costs. Operating in this sector obliges the companies to make huge investments to create the proper infrastructure to poke and process the ore therefore, they should be pecuniaryly stable on order to leave investing large amount of money.ABX im plemented a gold dodgerow program that quickly became an integral part of its corporate strategy. This strategy helped it to hedge efficiently against gold toll fluctuation. Besides, it accepted it to occasionally sell its gold at prices above those of the market. The exceptional performance of ABX was also due to its annual acquisitions. deal was an important aspect as well, since gold was discovered in most(prenominal) of its new properties. Moreover, American Barrick generated a stage set of notes, which it reinvested to finance its growth.It was also able to cut its expenses in order to enhance its growing profitability. The management of American Barrick wanted to diversify its activities by listing the telephoner in Toronto, Montreal, and the couplight-emitting diode States among others. The top managers were very serious about keeping a fiscal stability and a liquid proportionateness sheet by publicize few debts and hedge against take a chance. All in all, Ameri can Barrick attracted a lot of investors beca purpose of its risk management strategies, pass judgment future growth, strong and liquid balance sheet, and finally its efficient management team.b. Quantify the nature of gold exposure, that is, in the absence of a hedging program victimization financial instruments, how bare-assed would Barrick stock be to gold prices changes? For every 1% change in gold prices, how might its stock price be affected? How could the stiff manage its gold price exposure without the use of financial contracts? If American Barrick wanted to protect itself from gold price exposure without the use of financial contracts, it could use natural hedges. One way to hedge against undesired risk is to match cash flows such as revenues and expenses.In other words, a commodity producer such as American Barrick, which has revenues payables in U.S. dollars and incurs cash outflows in a different currency, will try to match its outflows to its expected inflows in the foreign currency. Another way of hedging against risk is the secure of indemnification to protect against financial loss due to external influences. It is also common to hedge gold investments against fluctuations of the U.S. dollar. It is extremely important for commodity traders to spang which currency is correlated with what commodity in order to be able to predict certain market movements for instance, there is often a nix correlation between gold and S&P 500.c. What is the stated objective of ABXs hedging program? What are the arguments for managing gold price exposure? ABX wanted to lock in the price at which it could sell its widening in order to avoid seeing the expected value of its projects hover widely. It wanted to differentiate itself from its competitor by choosing the right hedging policy. ABX aimed at being financially stable by protecting itself against the dips in the gold price. It vehemently argued that managing gold price exposure would allow it appropri ately think its cash flows, rise its production, and offers its investors a clear vision of their future earnings.d. How would you characterize the evolution of Barricks price risk management activities? Are they self-consistent with the stated policy goals? American Barrick used to use gold financings. by dint of this way of financing, investors could benefit from both the increase incurred in the volumes of gold to the bank and the gold price. In 1984 and 1985, ABX used forward sales right afterward a sharp demean in gold prices. This strategy allowed the company to eliminate its exposure to price drops however, it also limited its opportunities to benefit when the prices rose. This led it to try option-based insurance strategies that could manage the risk just still allow retaining some of the benefits of rising prices. However, as it needed contracts with a longer maturity, ABX shifted to make do deferred contracts. The evolution of Barricks risk management activities i s characterized by its wish to be fully protected against price declines and still be able to start out benefit from increasing gold prices.The risk management strategies implemented by American Barrick were consistent with their goals since its positions grew considerably. e. How should a gold mine which wants to moderate its gold price risk compare hedging strategies (using futures, forwards, gold loans, or disfigurement deferred contracts) with insurance strategies (using options)? On what basis should these decisions be made? Once a loaded has decided on either a hedging or an insurance strategy, how should it choose from among specific alternatives? A mine that wants to moderate its gold price risk should first analyse the differences between the hedging and the insurance strategies. Indeed, hedging allows eliminating risk by giving up the potential for gain. bit an insurance strategy requires a premium to eliminate risk but allows retaining the potential for gain.The decis ion should be made based on the cost of the strategy, the maturity of the strategy, and the degree to which the strategy allows to benefit from potential gains. Once a firm has decided on what strategy to follow it should choose among the real alternatives of to each one strategy. For the hedging strategy, the company should take into consideration the particularity of each financial instrument. Indeed, forward sales for instance, are usually for relatively unretentive delivery periods of under a few years.However, a continuous drop in gold prices might negatively affect the opportunity for the firm to sell at higher market prices. On the other hand, emplacement deferred contracts allow having multiple delivery dates. They enable the firm to profit from increases in the price and yet set a minimum price on its sales. For the insurance strategy, the main problem encountered by the firm is that of the cost. Indeed, the firm should use the premiums received from the sale of calls t o purchase puts. That way the cash inflows and outflows cancel out. The firm can also reduce the cost of insurance by adjusting the representative prices and rations of puts and calls to determine the degree at which it chose to participate in gold price rises.f. What is a smudge deferred contract? Explain the mechanics of the contract. Is it an option? A forward contract? Why has ABX chosen to rely on spot deferred contracts relative to other gold derivatives?As defined in the case, a spot deferred contract is a type of forward sale of gold. At the opposite of a forward where the delivery is set on undertake day (maturity), SDCs are characterized by multiple delivery dates. It is up to the seller to choose on which rollover date they would make the delivery. The seller has the weft to defer the delivery up until the end of the contract. In other words, the seller had flexibility as to when they would like to deliver the quantity of gold.ABX preferred SDCs to other gold derivati ves for the simple reason that they allowed it to profit from increases in the price of gold and yet set a minimum price on its sales of gold. Therefore, as years have gone by, ABX found itself using more and more SDCs at the expense of other hedging vehicles.