American Barrick Resources Corporation Case Essay

Words: 1329
Pages: 6

American Barrick Resources Corporation Case a. Explain the value chain for gold mining firms (how can a mine create a competitive advantage relative to its rivals). What are the factors that may explain exceptional performance of ABX relative to the other gold mines? To create a competitive advantage, a mine has to properly manage its exposure to gold price fluctuations. This is not an easy thing to do since there are so many factors to consider: when, how much, and how to hedge the gold production. Firms in this industry differentiate themselves based on the risk management strategies they implement. Furthermore, mines should also be able to minimize the cost of gold production along with making large sunk costs. Operating in …show more content…
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 appropriately forecast 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 Barrick’s price risk management activities? Are they consistent with the stated policy goals? American Barrick used to use gold financings. Through this way of financing, investors could benefit from both the increase incurred in the volumes of gold to the trust and the gold price. In 1984 and 1985, ABX used forward sales right after a sharp drop 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 but still allow retaining some of the benefits of rising prices. However, as it needed contracts with a longer maturity, ABX shifted to spot deferred contracts. The evolution of Barrick’s risk management activities is characterized by its wish to be fully protected against price declines and still be able to capture 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