Enterprise Risk Management at Barrick

Published on January 2017 | Categories: Documents | Downloads: 35 | Comments: 0 | Views: 444
of 3
Download PDF   Embed   Report

Comments

Content

Enterprise Risk Management at Barrick
Introduction Barrick was North America's #2 gold producer behind Newmont Mining, with nearly 87 million ounces of gold in proven and probable reserves. The company's operations were located mainly in USA, Canada, Australia, Peru, Tanzania, Chile and Argentina. About 60% of the company's production came from its 7,000-acre Goldstrike Property, located in Nevada's Carlin Trend gold-producing region. Its other important properties included the Bulyanhulu Mine in Tanzania, the Alto Chicama Mine in Peru, and the HoltMcDermott Mine in Canada. The company expected future revenues to come from its development projects in Argentina, Australia, Chile, and Peru. In late 2001, Barrick acquired 125-year-old Homestake Mining (US) in a $2.3 billion stock deal. In 2002, Barrick produced 5.7 million ounces of gold and recorded sales of $1967 million and net income of $193 million. Barrick had major plans for capacity expansion. Barrick's $95 million development budget, the industry's largest, was intended to increase production by over 20% by 2006. Barrick was also exploring gold deposits near its existing mines, a strategy it considered as having the lowest risk and highest potential for returns. Barrick was one of the more successful hedgers in the industry. The company estimated its hedging strategy had added more than $2 billion to profits since the late 1980s. Barrick believed its shares represented a unique asset class with a different risk profile, fulfilling a special role in the financial markets. Investors used gold-related investments to diversify their portfolio risks. The price of gold typically rose in times of uncertainty when prices of other financial assets fell.

Background Note
Barrick Gold started in 1983 when Peter Munk merged three small mining and oil and gas companies as Barrick Resources Corp. and took the company public. The company's early mining activities included stakes in Camflo Mines Ltd., the Renabie Mine in Ontario, and the Valdez Creek Mine in Alaska. Its oil and gas properties and interest in two coalmines were sold in the mid-1980s. Barrick Resources grew rapidly by buying up North American gold mines. It was renamed American Barrick Resources in 1985 after it acquired the Goldstrike Property. In 1988, American Barrick had seven producing mines in Alaska, Nevada, Utah, Ontario and Quebec. That year the company opened the Holt-McDermott Mine, the first property it developed all the way from exploration to production. Also in 1988, American Barrick completed a $23 million ore-processing complex at Goldstrike.

American Barrick discussed merging with Newmont Mining in 1991, but the talks were called off. In 1994 it purchased Lac Minerals Ltd., which included Chilean mines in South America's richest gold belt. By 1995, when the company was renamed Barrick Gold, it had become the largest gold producer outside South Africa. Also in 1995 the company acquired a 40% stake in the High Desert Property, now the Newmont/Barrick HD joint venture, in Nevada. Barrick paid $800 million in 1996 for Arequipa Resources, which owned the Pierina Mine in the Peruvian Andes. It also bought Chile's Pascua Mine and expanded its presence in Argentina. Barrick had a stroke of luck in early 1997 following failure of talks to develop the Busang project in Indonesia with fellow Canadian firm Bre-X. The project was later discovered to be the mining industry's greatest fraud. When gold prices plunged in 1997, Barrick announced plans to close mines in Chile and the US -- cutting about 42% of its workforce. With gold prices still very low in 1998, milling operations were suspended at the Pinson Mine in Nevada. Barrick also reached a joint venture agreement with Anglo American's gold subsidiary, AngloGold, to develop Barrick's potential gold properties in Congo, Mali, Niger, and Senegal. This reduced Barrick's exposure in the unstable region. In 1999 Barrick moved into Africa with its $281 million acquisition of Sutton Resources, owner of the Bulyanhulu property. It also exchanged some land in the Carlin Trend with Newmont. Barrick's hedging practices came under attack from investors in 2000, despite company estimates that it earned an additional $391 million through hedging in 1999 and another $300 million in 2000. A lawsuit was filed against the company that it had been actively and deliberately suppressing the price of gold. In 2000 Barrick acquired Canadian gold exploration company Pangea Goldfields, including operations in Peru and near Bulyanhulu in Tanzania. Production began at Barrick's Bulyanhulu mine in 2001. Barrick also acquired rival gold producer Homestake Mining in a $2.3 billion stock deal during the year. The company announced a rich strike at its Alto Chicama gold property in Peru in 2002. Barrick closed its El Indio, Bousquet, McLaughlin, Ruby Hill, and Agua de la Falda mines in 2002...

Excerpts - Overview of Risks
Barrick had identified various risks for regular monitoring and management - changes in the price of gold and certain other commodities; regulatory, political or economic developments in the areas in which it did business; and changes in mining or processing rates. With a large proportion of Barrick's reserve base undeveloped, the timing of commencement of production, as well as capital and operating costs of the company's development projects would have a significant impact on future financial performance. Gold and Silver Price Risk Gold prices were volatile because the market for gold was relatively small. The entire investment across the world in gold (bars and coinage) in 2002 was estimated by British consulting group, Gold Field Mineral Services Ltd to be only 449 tonnes or $4.5 billion... Forward Sales Contracts Barrick's forward sales program was an important tool to manage financial risk. Barrick believed the program enabled it to plan major capital investments for the development of new mines... Energy Price Risk Electricity and diesel fuel costs represented approximately 16% of the total cash costs per ounce for 2002... Interest Rate Risk Barrick's interest rate risk exposure mainly related to future contango returns in its spot deferred contracts, the fair value and ongoing payments under lease rate and US dollar interest-rate swaps, and interest receipts on cash balances. Barrick was more adversely affected by lower than higher interest rates... Currency Risk Although Barrick operated on four continents, it did not view currency fluctuations as a significant risk. Nearly half of its production came from mines in the US. All revenues and most cash expenditures were denominated in US dollars... Liquidity Risk Barrick's operating cash flows were affected by the volume of gold sales, gold prices and cash operating costs. Barrick believed it had healthy operating cash flows. In 2003, Barrick expected cash flows to remain at levels, similar to those in 2002... Derivative Risk Derivatives were an integral part of Barrick's financial risk management strategy. Barrick did not hold derivatives for the purpose of speculation. Its derivative program was designed to enable it to plan its operations on the basis of assumptions that would not be jeopardized by future movements of gold and silver prices, interest rates and currency exchange rates...

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close