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MANAGING GOLD PRICE RISK AT

AMERICAN BARRICK

A CASE STUDY FOR CORPORATE RISK MANAGEMENTBy Group 4 :

Budi SetyawanDaniel Indra Mulia

Didik Susilo H.Indah Pancawardani

Yogi Pamungkas

FM : Dr. Ida Juda

Agenda

Gold Mining Industry Overview Risk Management at American

Barrick Conclusion

Major Product :GOLD

Product Usage :Previously it was used as currency, now as currency back-upJewelry (major part, about 80% of current use)Industrial Usage

Gold Mining Industry

Production Process (Tech.)

Exploration Exploration Drilling Open Pit Mining

Blasting Underground Mining Ore and Waste Haulage

Production Process (Tech.)

Heap leaching Milling Oxidization

Leaching Stripping Electro-winning

Production Process (Tech.)

Smelting Gold Bullion

Reclamation

Refining

Cost Structure

Major cost comes from the exploration and exploitation /acquisition activities

Virtually no marketing and distribution cost (market always ready to absorb their product in market prices)

Competitive advantage of a company compared to the others coming from its efficiency in exploration and acquisition cost

Highest risk exposure coming from the fluctuation of gold market price

Price Fluctuation

Gold spot-price change in the last 30 years *) :

*) www.goldprice.org

Price Fluctuation – cont.

Gold spot-price last 5 years :

*) www.goldprice.org

Major Industry Players:

Barrick Gold Corp. Newmont Gold Pegasus Gold LAC Minerals Hostake Mining FMC Gold Echo bay Battle Mtn. Amax Gold

•Major Gold-mining Firms :

BARRICK Gold Corporation

(also known as “American Barrick” )

Company Overview

Entered Gold Mining Business in 1983 Largest Gold-mining company in the world (after

acquisition of Placer-Dome in 2006), HQ in Toronto, Canada, with 4 Regional Business Unit in Australia, Africa, North America and South America *)

Growth from 1984 to 1992: Market capitalization : from $64 M to $5 B Annual production : from 34K Ounces to 1.325M

Ounces As of December 2008 : annual production 7.7M Ounces,

Proven and probable gold reserves : 138.5M Ounces

*) www.wikipedia.org

Managing Gold Price Risk:

Creates stable, predictable returns regardless of short-term market conditions.

De-linking Barrick's earnings from the volatility in the spot gold market.

Creates additional cash reserves that can be used to acquire new assets to generate new earnings.

The Hedging Philosophy:

Hedge Position

In 90’s Barrick hedged more than 90% of its gold production

In 2000’s the hedged portion is consistently reduced due to the trend of increasing gold prices

The Hedging Methods

Gold Financing Forward Sales Options Spot Deferred Contracts

Gold Financing

Used to finance the new acquisition (1983-1987) Methods of Gold Financing:

Issuing Gold-Trust (It raised $17 millions)The Gold-trust paid the investors 3% of mine’s output if gold price <= $399 /ounces, rising to 10% if gold price = $1,000 /ounces

Bullion Loan :Barrick received gold from the lender-bank which it immediately sold to the market to get cash. Then Barrick repay the loan in monthly installments in ounces of gold with the interest rate of about 2% per year.

Issuing Gold-indexed securities

Forward Sales/Contract

The forward sale is a commitment by the producer to deliver a fix amount of gold to the contract counterparty at a time in the future at a fixed price.

The forward price of the contract is based on the spot price on the date of the contract plus a premium (contango).

The contango is the difference between the interest rates for lending Dollar less the gold lease rate.

The forward sale eliminates downside risk exposure, but the company lost the opportunity to sell at higher price

Options

Options is the right to choose whether to sell or to buy at a given price •Barrick bought Put Options and

sold Call Options to execute a “Collar Strategy”.

•This allowed Barrick to benefit from price increases between put option price and call option price .

•This protected Barrick from price drops without initial cash outlay (it used the premium received from selling the Call Options to buy the Put Options)

$

Strike price

Payoff

Call

Put

Spot Deferred Contract

Simple Forward sales or Options are fairly short in duration (1-5 years) which is less than Barrick’s 20-year production horizon.

Barrick began investing in Spot Deferred Contracts (SDCs).

SDC’s are like forward contracts but have multiple “rollover” delivery dates over 5-10 year period.

Barrick could deliver on specific delivery date or rollover to the next date if it could make more money by selling its gold in the market at the current spot price.

CONCLUSION

The Hedging reduces the risk exposure due to the price drop, at the same time it prevent the company to benefit from price increase

The hedging methods, related to the contracted price, time horizon and how many percent the gold production shall be hedged, must be evaluate from time to time in order to get the maximum value for the company

THANK YOU

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