barrick

barrick - American Barrick Resources Corporation How...

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American Barrick Resources Corporation
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How Sensitive Would Barrick Stock Be to Changes in Gold Price in the Absence of Risk Management?
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Pre-tax earnings (Exhibit 2) 223m Reduction in earnings if gold sold at spot 1,280m oz.X(422-345) Exhibits 2 and 12 (99m) Proforma pre-tax earnings 124m Taxes 21% tax rate, exhibit 2 (26m) After-tax earnings 98m
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Elasticity of Earnings and Profits for 1% Change in Gold Price 1% change in gold price $3.45 Number of ounces 1,280m Additional pre-tax profits $4.4m Additional after-tax profits $3.5 Additional profits as % of earnings 3.5% Cash flow = Earnings + Noncash charges = 98m + 69m = 167m Additional profits as % of cash flow 2.1%
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What is Barrick’s Risk Management Program?
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Guidelines Fully protected against price declines for 3 years output. 20-25% for next decade.
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Why Manage Gold Price Exposures?
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Arguments Pure bet on operational efficiencies for investors. Do they want that or do they want gold? Have funds available to invest when external financing is costly. Eliminating deadweight costs of distress. Tax arguments: If net income is negative, lose use of tax shields.
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Ownership and Risk Management If managers have large stake in firm, they don’t want the risk. Eliminating hedgeable risks makes it possible to have concentrated ownership. Barrick management owns 29.6% of Barrick for a value of $900m. Let’s look at the other firms: Exhibit 3.
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What Instruments Did They Use to Manage Risks?
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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
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This note was uploaded on 04/20/2011 for the course FBE 459 taught by Professor Matos during the Spring '08 term at USC.

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barrick - American Barrick Resources Corporation How...

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