American Barrick Resources

Corporation

Submitted By:

Bhavesh Jain
(10ESPHH010016)

Kush Kumar
(10ESPHH010009)

Rajat Kataria
(10ESPHH010006)
1
 Agenda
The Gold Hedging Program

Challenges / Concerns

About American Barrick

Diversity of Risk Management Practices in Gold Industry

Instruments for managing Gold Price Risk

Conclusion

2
 The Gold Hedging Program

One of the fastest growing gold mining firm

Manage firm’s exposure to gold price risk

This program is integral part of firm’s corporate strategy

Managed by financial executives: Wilkins, Wickham and Oliphant

3
Challenges / Concerns to the Program

Latest gold findings – Meikle Mine

Meikle Mine Development Project required capital

investment of $180 m. Yield of 400,000 ounces of gold
annually for 11 yrs

When, how much and how to hedge its gold

production

Processing of rich ore would increase production level

– concern is how to hedge this new development

Maintain a hedge position in the environment of low

gold prices and low interest rates

4
 About the Company

Equity Annual Proven

Peter production
Company
Market reserves grew
Munk – grew from increase because of –
cap. 34,000
founder, Created from Annual
Increased ounces in
322,000 acquisi
chairma in 1983 from $46 1984 to
1.325 mn ounces to tions
n and m to $5 B ounces by nearly 26 Good
CEO by 1992 1992 m ounces fortune

5
 Acquisitions
1983 ●
purchased interests in Canadian and Alaskan mines

●
purchased interests in Pinson mines & acquired Camflo
1984 Mine. It tripled Barrick’s reserves

1985 ●
purchased Mercur Mine near Salt Lake City

1986 & early 1987 ●

purchased GoldStrike Mine

6
 Contd…
pri cesIt was
It was fast
●
Acqui red gol d mi nes at rel ativel y low

● Generated
Struck huge gold reserveslarge
in GoldStri ke

growing
●
deal
operatingprofitable
Increased P roductionas
cash
expenses in M ercur Mine
well
flows
capacity and cut -
invest
Gold P rice Mback inP rogram
anagement mines. enabled
asbecause
profitable.
–
●

it to s ell at higher price

7
 Contd…
Maintain conservative financial policies by –
Develop a diversity of gold-producing
Tenets of the Company interests in North America
Issuing little debt
Moderating firm’s gold price risk

Barrick adopted 2 ways to moderate risk (Earlier) selling / hedging risk to others (Later) insurance strategies

Adept in using innovative financial techniques and instruments

Investors had confidence in company & so its stock out performed the market and peer firms (Exhibit 4)

8
 Exhibit 1
Gold Gold % change in
Production Reserves Cash Gold Gold Production as well
Year (oz.) (oz.) Cost/Ounce Reserves as gold reserves
1984 34078 322000 247   increased over the years
(1984 to 1992)
1985 115952 1842000 217 472.05%
1986 186072 2905800 200 57.75%
1987 225109 10812400 246 272.10% Cost / Ounce has gone
up in 1989 to 1991
1988 341000 17082900 280 57.99% because of stripping
1989 467837 19876600 307 16.35% cost.
1990 596220 19510400 343 -1.84%
1991 789846 24377000 305 24.94% This cost includes cost of
removal of overburden and
1992 1322432 25708700 210 5.46% waste materials during the
development & expansion of
existing mines and acquisition of
new mines

9
 Exhibit 2 Year
Total Total Shareholder's Net
Assets Liabilities Equity Income CFO CFI CFF
1983 40422 8313 32109 -1226      

CFO and Net Income 1984 168489 87436 81053 -9056 71 -99015 71944
have increased over
the years even in 1985 165329 98384 66945 3095 12646 -20682 31803
the years 1989 to
1986 318884 210093 108791 11588 24466 -95679 73466
1991 when their
cash cost/ounce was
above $300 as seen 1987 675785 337645 338437 20570 37276 -192871 320945
in Exhibit 1.

1988 700825 310350 390485 30495 61693 -195175 21980

The reason for this is that
they were able to sell the
gold at higher prices ($430
to $450) than COMEX 1989 1050069 524551 525518 33735 76801 -114569 290354
price ($360 to 390).In
1987 and 1989 there was
a sharp increase in CFF
because of the gold loan 1990 1146883 502007 644876 58205 94040 -160263 72976
that they used to acquire
2 gold mines – Goldstrike
and Mercur Mines. 1991 1306337 465684 840653 92440 160233 -303346 28415

1992 1504293 511564 992729 174940 282782 -272209 26598

10
Gold Producers and Production

11
 Operating & Financing Performance (Exhibit
3)
American Barrick was way ahead in
minimizing the costs and increasing the
operation efficiency –
●
Average realized price/oz - $438; highest among peers
●
Total cost/oz - $274; lowest among peers
●
Total reserves (million oz) – 25.3; highest
●
Hedging as percent of production – 94%; highest
●
Shareholder’s equity book value - $841; just below Placer Dome
●
% of firm owned by Officers and Directors – 25%; highest
●
Average price/oz. of hedge production - $424; this is good as seeing the % of
production hedge
●
Stock return (1988-1992) is 218.7%; other firms are in negative

12
 Exhibit 5
Price of Central Reser There
gold/oz. banks
offloade ves is a
is
d the fell direct
declinin
g after gold as from relatio
it was n
1980 till 886 m
no
1993 betwe
not only
longer oz in
playing en
in the
1968 inflatio
nominal central to 726 n rate
terms role in m oz and
but also world
in real econom
in gold
terms y. 1991 prices

13
 Diversity of Risk Mgmt Practices in Gold
Industry (Exhibit 6 & 7)

No. of firms They

Australian managing increased
Risk mgmt Percent of
Firms > their risks the % of
activities Production
North increased production
varied Hedged
American from 35 in hedged
among increased
Firms > 1990 to 52 because the
gold in 1992 for for North gold prices
South
mining North American were
African
firms. American firms continuousl
Firms
firms y decreasing

14
Comparison of Percent of Production Hedged
(Exhibit 8)
1992 1993 1993
American 94% 96% 96%
Barrick Big firm like Homestake engaged in no
risk management
Amax 50 12 12
Gold
Echo Bay 15 4 12
LAC 80 49 6 But for American Barrick, managing
Minerals gold price risk was one of the business
NewMou 29 16 0 objectives and was integral part of
nt Mining business
Pegasus 68 10 10
Gold
Barrick had maximum % of production
Placer 24 14 14 being hedged as compared to other
Dome firms which might be due the fact that
mgmt was holding 25% of the equity

15
Instruments for Managing Gold Price Risk

Gold
Forward Sales
Financings

Options and Spot Deferred

Warrants Contracts

16
 Gold Financings
American Barrick used many financial
vehicles for acquisition and expansion of
its mines. Some of these are –
●
Barrick Cullaton Gold Trust – 3% of mine output when gold price was below
$399 per ounce. Rising to 10% when gold price was at $1,000 per ounce
●
Bullion Loans – entered into a bullion loan with Toronto Dominion bank for
acquisition of Mercur Mine in 1985. In this, it received 77000 ounces of gold
and raised $25 m from market. It will repay the loan in EMI in ounces of gold
at rate of about 2% p.a. over 4.5 yrs
●
Gold Indexed Eurobond – Offered $ 50 m in 2% gold-indexed notes to Euro
market investors.

17
 Forward Sales

These are OTC Spot Prices in They sold

Forward sales 1984 was $ 360 20,000 ounces
transactions
proved costly and Forward of gold in 1984
typically for contract rates for
in 1984 and but the prices
10000 ounces American Barrick recovered later
1985.
or more. was $ 311. on.

18
 Gold Price Forward Price
Year (Per Oz.) (Per Oz.) Fwd - Spot % change
Exhibit 9 Jan,1982 384.11 443.56 59.45 15.48%
Jun,1982 314.93 359.59 44.66 14.18%
Jan,1983 479.88 522.11 42.23 8.80%
Jun,1983 412.82 451.75 38.93 9.43%
Jan,1984 370.86 405.72 34.86 9.40%
As we see that the difference Jun,1984 377.64 423.53 45.89 12.15%
between forward and spot gold Jan,1985 302.77 327.75 24.98 8.25%
prices are shrinking over the years.
Since the Contango is decreasing. Jun,1985 316.39 338.95 22.56 7.13%
Jan,1986 344.58 368.06 23.48 6.81%
Contango is the difference Jun,1986 342.77 363.68 20.91 6.10%
between interest rate for Jan,1987 408.31 428.69 20.38 4.99%
lending dollars and the interest Jun,1987 449.57 481.376 31.806 7.07%
rate for lending gold.
Jan,1988 476.57 507.29 30.72 6.45%
Jun,1988 451.34 481.96 30.62 6.78%
Jan,1989 403.99 436.6 32.61 8.07%
Jun,1989 367.59 393.11 25.52 6.94%
Jan,1990 410.12 439.17 29.05 7.08%
Jun,1990 352.31 377.28 24.97 7.09%
Jan,1991 384.47 403.7 19.23 5.00%
Jun,1991 366.7 387.37 20.67 5.64%
Jan,1992 354.43 366.38 11.95 3.37%
Jun,1992 340.8 352.52 11.72 3.44%
Dec,31,1992 333.33 340.86 7.53 19
2.26%
 Exhibit 10
Average
If the Barrick has not gone Ounces Date of Price Gain /
for hedging, their would Sold Longest at COMEX - Loss (if
have been a significant loss. Forward Forward Delivery COMEX Delivery not
Year (000s) Sale ($) Price Price hedged)
1984 0          
1985 79.4 Dec-86 336 368 32 2540800
1986 92.6 Dec-87 364 447 83 7685800
Barrick stopped using
1987 37.9 Jan-89 497 437 -60 -2274000
Forward Sales of Gold after
1990 probably because 1988 56.6 Dec-92 486 345 -141 -7980600
Contango was decreasing. 1989 117.4 Dec-91 427 362 -65 -7631000
1990 0          
1991 0          
1992 0          
So they started looking for Total
option based insurance Loss -7659000
strategies which will benefit
them from downside risk as
well as gain if prices rise.

20
Options and Warrants (Exhibit 11)

The firm Spot prices were This was This was

declining which because, much
stopped led them to market was shorter than
adding lower the call
liquid only 20 yrs of
new strike price. That
means, company for contracts expected
options with production
had to surrender
positions the upside maturities currently in
from 1990. potential. under 2 yrs. reserve.

21
 Spot Deferred Contracts
A type of forward sale of gold.

We have multiple delivery dates with final one being 5 or 10 yrs after initiation of the
contract.

Have right to defer the delivery until the end of the contract

Barrick could deliver on the contract or it could roll the contract forward to the next
period

Pricenext year = prior contract price + prevailing contango premium

22
 Exhibit 12

Avg COMEX
Avg price for Gold Ounces Price - Gain / Loss
Delivered during Delivere COMEX Delivery (if not
Year Yr ($) d Price Price hedged)
Had they not 1984
1985
311
333
34078
115952
360
317
49
-16
1669822
-1855232
gone for 1986 348 185359 368 20 3707180
hedging, there 1987 410 219776 447 37 8131712
1988 446 330479 437 -9 -2974311
would have 1989 436 472452 393 -43 -20315436
been a 1990 437 575656 384 -53 -30509768
significant loss 1991 438 787735 362 -76 -59867860

1992 422 1280320 345 -77 -98584640

        Total Loss -200598533

23
How Sensitive Would American Barrick Stock Be to Changes in
Gold Price in the Absence of Risk Management?

• Pre-tax earnings (Exhibit 2) $222.744 mn ……. a)

• Reduction in earnings if gold was sold at spot (Exhibit 2 and 12)
[1.280320 mn oz. * (422-345) ] $ (98.585) mn ……… b)

• Pre-tax earnings (a+b) 124.16 mn ……… c)

• Taxes (21% tax rate, exhibit 2) 26.07 mn ………
d)
• After-tax earnings (From Hedging) 98.07 mn

24
 Elasticity of Earnings and Profits for 1% Change in Gold Price

1% change in gold price $3.45

Number of ounces 1.280322 mn
Additional pre-tax profits $4.42 mn
Additional after-tax profits $3.49 mn

25
 Assumptions for Hedging Calculation

Contracts are SDC

Implied Volatility of gold to be 13% (Exhibit 15)

Contango Premium for 1st yr i.e. 1993 (4.06%-1.80%) = 2.26% (Exhibit 15)

Contango Premium for 2nd and 3rd yr i.e. 1993 and 1995 is (4.93%-2.25%) = 2.68%
(Exhibit 15)

26
If Barrick Hedged 1.7 mn ounces of Gold
Total Gain/Loss
  1992 1993 1994 1995 ($ mn) Scenario
All three yrs
Spot 333.33 376.6629 425.629077 480.960857  Increase
Forward   340.86 348.563436 357.9049361   
Profit   0 0 0 0 
All three yrs
Spot 333.33 289.9971 252.297477 219.498805  decrease
Forward   340.86 348.563436 357.9049361   
Profit   28.82231 54.5507101 78.43014095 161.8031611 
Spot 333.33 376.6629 327.696723 370.297297  Inc-Dec-Inc
Forward   340.86 348.563436 357.9049361   
Profit   0 23.6489414 0 23.6489414 
Spot 333.33 289.9971 327.696723 285.096149  Dec-Inc-Dec
Forward   340.86 348.563436 357.9049361   
Profit   28.82231 11.8244707 41.25831268 81.90509338 
Spot 333.33 376.6629 425.629077 370.297297  Inc-Inc-Dec
Forward   340.86 348.563436 357.9049361   
Profit   0 0 0 0 
Spot 333.33 289.9971 252.297477 285.096149  Dec-Dec-Inc
Forward   340.86 348.563436 357.9049361   
Profit   28.82231 54.5507101 41.25831268 124.6313328 
27
If Barrick did not Hedged 1.7 mn ounces of Gold
Total
Gain/Loss
  1992 1993 1994 1995 ($ mn) Scenario
Spot 333.33 376.66 425.63 480.96  All three yrs Increase
Profit   24.56 27.75 31.35 83.66 
All three yrs
Spot 333.33 290.00 252.30 219.50  decrease
Profit   -24.56 -21.36 -18.59 -64.50 
Spot 333.33 376.66 327.70 370.30  Inc-Dec-Inc
Profit   24.56 -27.75 24.14 20.95 
Spot 333.33 290.00 327.70 285.10  Dec-Inc-Dec
Profit   -24.56 21.36 -24.14 -27.33 
Spot 333.33 376.66 425.63 370.30  Inc-Inc-Dec
Profit   0.00 27.75 -31.35 -3.61 
Spot 333.33 290.00 252.30 285.10  Dec-Dec-Inc
Profit   -24.56 -21.36 18.59 -27.33 

28
 Conclusion

American Barrick should go for Hedging

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