419 gold 051

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Information about 419 gold 051

Published on April 17, 2008

Author: Gulkund

Source: authorstream.com

The Gold Industry:  The Gold Industry Presented by: Andreana Lu Yang Ivy Wai Ting Fung Simon Wisniewski Jeff d’Avignon Gold Mining Industry:  Gold Mining Industry Demand & supply of gold Production of gold Market dynamics Large producers Firm cost structure and revenue composition Firm strategies going forward Demand & Supply of Gold:  Demand & Supply of Gold The market dynamics of gold are dominated by short-term supply and demand fluctuations Sudden surge in demand or disruption in supply can lead backwardation, where the spot price is higher than the forward price The gold market is usually in contango, due to the smoothing of supply that is possible due to accessible stocks. Demand & Supply of Gold:  Demand & Supply of Gold How Gold is Mined:  How Gold is Mined Exploration Exploration Drilling Blasthole Drilling Blasting Underground Mining Ore & Waste Haulage How Gold is Mined :  How Gold is Mined Heap Leaching Mining Oxidization Leaching Stripping Electro-winning How Gold is Mined:  How Gold is Mined Smelting Gold Bullion Refining Reclamation How Gold is Traded:  How Gold is Traded Over the Counter Between principals, not through exchanges Contracts terms are flexible Main centers: London, New York, and Zurich Mining companies and central banks tend to transact their business through London and New York Twice daily during London trading hours there is a “fix” which offers reference prices for that day’s trading. The Settlement Process :  The Settlement Process The basis of settlement is delivery of a standard London Good Delivery Bar, at the London vault nominated by the dealer who made the sale. Currency settlement for gold transactions will generally be in US dollars over a US dollar account held in New York. Market Dynamics: Gold Prices:  Market Dynamics: Gold Prices Gold Prices Comparisons:  Gold Prices Comparisons Like all prices, the gold price reflects not only the inherent value of gold, but also the relative strength of the currency in which it is quoted. Largest gold producers by market capitalization:  Largest gold producers by market capitalization Companies: Anglo American PLC Newmont Mining Corp. Barrick Gold Corp. AngloGold Ashanti Ltd. Placer Dome Inc. Gold Fields Ltd. Market Capitalization: 35.87B 20.28B 13.73B 10.10B 7.76B 6.26B Firm Cost Structure & Revenue composition:  Firm Cost Structure & Revenue composition Cost Structure: Costs applicable to sales of gold and other base metals Depreciate, depletion & amortization Depreciation, depletion, & amortization Exploration, research & development General & administrative Mergers and resturing Writ-down of long lived assets Others Revenue Composition Sales of gold Sale of other base metals Gain on investment Gain on derivative instrument Gain on dividends, interest & foreign exchange income Issues Facing Gold Companies:  Issues Facing Gold Companies There have been only a few large deposits found since 1998 and none of these have made it to production as of yet Rising costs with gold prices impose questions of the ability to finance and develop projects Copper-gold projects will become more common in gold company portfolios Firm Strategies & Key Success Factors:  Firm Strategies & Key Success Factors Effective cost control to maximize margin by improving supply chain management and usage of technologies such as e-commerce Strategic balance between gold mine grades produced and life of assets Continuous commitment to research & development to uncover large gold deposits Risk Assessment:  Risk Assessment Three major market risks faced by firms in gold mining industries: Commodity Price Risk Foreign Exchange Rate Risk Interest Rate Risk Commodity Price Risk:  Commodity Price Risk Commodity Price Risk = Gold Price Risk (the change in the price of the gold) It affects gold mining companies’ Asset values Profitability of its operations Cash flows generated those operations Commodity Price Risk :  Commodity Price Risk The price of gold is affected by numerous factors: Demand for gold in both jewellery and industrial uses International/regional, political/economic trends The relative strength of U.S dollars of other currencies Financial market expectations Numbers of speculative activities Reserves Number of forward sales Production and cost levels for gold Foreign Exchange Risk:  Foreign Exchange Risk Is the change in the relative values of currencies Since gold mining companies do not have the luxury of choosing where the ore bodies are, they usually have their mining operations, activities, investment outside of their countries Their revenue and costs are primarily incurred in foreign currencies Adverse movement will affect a company’s: Cash flows Profitability Interest Rate Risk:  Interest Rate Risk Interest rate exposures impact a company’s: Cash Balances Borrowings (to meet short falls in current cash flows) Long term debts Hedging activities (the impact international interest rate differentials) Returns on its assets Firm value Significant decrease in interest rates and/or increase in gold lease rates can have a great negative impact on the price of the new gold sales contract and on the difference between the forward gold price & current spot price Effective Risk Management:  Effective Risk Management All gold mining companies face a similar exposure The prospects depend on its risk management decisions and strategies Firm characteristics play a major role in risk management Measurement of Risks:  Measurement of Risks Methods vary across industries and firms within the same industry No specific requirements needed for gold mining companies In theory, should use delta calculation Delta: the change in the value of a portfolio with respect to a change in the price of the underlying asset (gold) Delta % : portfolio delta / amount of gold produced over 3 years Measurement of Risks:  Measurement of Risks BUT: Most gold mining companies do not use this delta calculation No mention of the volatility of spot gold prices Instead, they only briefly mention that a certain dollars per ounce change in the gold price would result in an increase or decrease in approximately how many dollars change in cash flow from operations and net income. Techniques and Products:  Techniques and Products Gold producers can use: Future Contacts Gold loan Gold Swaps Spot deferred contract Forward sales of gold Put options (Insurance purpose) To hedge themselves against the exposures Derivative Usage for Gold Price Risk:  Derivative Usage for Gold Price Risk Most gold mining companies use: Forward contracts Spot deferred contract Put and call option Gold lease rate swaps Most prefer to use forward contracts as its hedging instruments due to the introduction of SFAS NO 133/138 This allows gold producers to not consider their sales contracts as derivative instruments as long as they are considered to be normal sales Gold mining firms can record the proceeds under this contract as revenue and can be held off balance sheet until maturity, the date of the delivery of the gold in the future Derivative Usage for Foreign Currency Risk:  Derivative Usage for Foreign Currency Risk Gold mining companies use: Currency forwards Currency options Since gold is quoted and traded in US dollars, gold producers with operations and investment in a large number of countries outside U.S will be exposed to foreign exchange rate risks Derivative Usage for Interest Rate Risk:  Derivative Usage for Interest Rate Risk Gold mining companies ONLY use: Medium to long term horizon interest rate swap Interest rate risk is not viewed as important as the gold price risk and currency risk due to the low leverage in the gold mining industry Firm Characteristics Factors:  Firm Characteristics Factors Firm Size Is measured by the firm’s gold reserves representing the maximum collateral value and the market value of assets It is proven that firm size is negatively correlated with the degree of hedging Smaller firms tend to have little negotiation power and have a higher chance of facing higher financing costs Liquidity Is important in determining how much funds a firm can provide in terms of emergencies With a large cash balance, firms will face fewer financial constraints and hardships So, they do less hedging as their risk management strategies Firm Characteristics Factors:  Firm Characteristics Factors Leverage Firms with higher leverage have a higher chance of facing financial constraints They do more hedging in their risk management strategies Since gold mining industry has low leverage levels, it will not have a major impact on the firms Average Cash Cost Is important element in determining gold mining companies’ profitability, efficiency and productivity There is a positive association between financial distress and average cash cost Since smaller firms tend to have a higher cash cost average than large firms, they have a greater tendency to encounter financial distress when the price of gold decreases Potential Hazards:  Potential Hazards Gold mining companies use different derivative instruments to hedge themselves against the risks that they face from potential future movement in market variables The main motives for hedging: To cover the total operating costs Remove price risk Enhance revenue Control their cash flows Potential Hazard :  Potential Hazard BUT No assurance that outcome of hedging will be better than the outcome without hedging Leave firm’s profit to be dependent solely on the underlying productive activities May suffer opportunity loss Risks due to Hedging:  Risks due to Hedging By hedging, firms face: Credit risk Market liquidity risk Mark to market risk Risks associated with factors such as: Default by counterparty Costs associated with unwinding the position Possible restrictions on credit lines In order to develop an effective risk management program, a firm should make a clear statement about the firm’s risk management philosophy Newmont Mining Corporation:  Newmont Mining Corporation Creating Value with Every Ounce … Corporate Profile:  Corporate Profile Incorporated in 1921 Trades on NYSE, Australian and Toronto stock exchanges (NYSE & ASX: NEM; TSX: NMC) Newmont Mining Corporation is the world’s largest gold producer Has operations in US, Canada, Australia, Peru, Indonesia, Uzbekistan, Turkey, Bolivia, New Zealand and Mexico The only S&P 500 gold stock In addition to gold, also engages in the production and exploration of silver, copper and zinc Most of Newmont’s revenues come from the sale of refined gold in the international market Newmont Properties:  Newmont Properties Creating Value with Every Ounce…:  Creating Value with Every Ounce… ACHIEVED STRONG EARNINGS GROWTH AND CASH FLOW GENERATION Net income of $476 million, $1.16 earnings per share $589 million net cash provided from operations, after using $121 million for the settlement of effective cash flow hedges DEMONSTRATED OPERATING EXCELLENCE ACROSS ALL CORE REGIONS Gold sales of 7.4 million equity ounces DEMONSTRATED LEVERAGE TO THE GOLD PRICE Unhedged philosophy Substantially eliminated the acquired Australian gold hedge books Record gold reserves of 91.3 million equity ounces STRENGTHENED BALANCE SHEET Reduced debt by $739 million Financials:  Financials Today: Can$ 53.730 EPS  1.36 P/E  39.50 52-Week High  61.950 52-Week Low  48.110 Hedging Philosophy:  Hedging Philosophy With respect to gold, Newmont’s philosophy is to remain largely unhedged and the corporation generally sells its gold production at market prices Historically, Newmont has, on a limited basis, entered into derivative contracts to protect the selling price for certain anticipated gold productions and to manage risks associated with: Commodity price changes Foreign currency changes Interest rates changes The hedging policy authorized by Newmont’s Board of Directors limits total gold hedging activity to 16 million ounces Commodity Price Risk:  Commodity Price Risk Newmont’s business is extremely dependent on the price of gold, which is affected by numerous factors beyond Newmont’s control: Actions by governments and central banks, a strong U.S. dollar, recessions, speculative trading, decreased demand, high supply of gold from production, disinvestment, scrap and hedging sales by gold producers in forward transactions and other hedging transactions Any drop in the price of gold adversely impacts Newmont’s revenues, profits and cash flows, particularly in light of their unhedged philosophy Based on estimates of Newmont’s stand-alone 2004 production and expenses, a $10-per-ounce change in the gold price would result in an increase or decrease of approximately $55 million in cash flow from operations and approximately $50 million in net income Elimination of Hedge Positions:  Elimination of Hedge Positions Following the Normandy (now Newmont Australia) acquisition, and in accordance with the company’s unhedged philosophy, efforts to reduce and simplify the Normandy hedge positions have been undertaken Accordingly, the Normandy gold hedge books have been reduced by approx. 9.4 million ounces since February 2002 Gold forward sales contracts and other “committed hedging obligations” were reduced by 7,547,000 ounces since February 15, 2002 by delivering production into the contracts or through early close outs Thus, as of December 31, 2003, the gold hedge book has been eliminated Use of Derivatives:  Use of Derivatives Newmont had no gold forward sales contracts at December 31, 2003, although positions existed at December 31, 2002. Newmont had $11,758 million fair value of gold put option contracts outstanding at December 31, 2003 and $22,604 million back on December 31, 2002. Newmont had no gold convertible put option contracts and other instruments outstanding at December 31, 2003, although positions existed at December 31, 2002. Newmont had no gold sold convertible put option contracts outstanding at December 31, 2003, although a position did exist at December 31, 2002. Price-Capped Sales Contracts:  Price-Capped Sales Contracts In September 2001, Newmont entered into transactions that closed out certain call options through replacement with a series of forward sales contracts requiring physical delivery of the same quantity of gold over slightly extended future periods Under the terms of the contracts, Newmont will realize the lower of the spot price on the delivery date or the capped price ranging from $350 per ounce in 2005 to $392 per ounce in 2011. These forward sales contracts are accounted for as normal sales contracts under SFAS 133. USD/Gold Swap Contracts:  USD/Gold Swap Contracts Prior to Newmont’s acquisition, Normandy entered into a USD/gold swap contract whereby principal payments on USD bonds were swapped into gold-denominated payments of 600,000 ounces in 2008 This instrument was marked to market at each period end, with the change reflected in income until the contract was closed out during the NYOL buy back transaction This position was extinguished as part of the NYOL voluntary administration process and the fair value of this instrument at December 31, 2002 was a negative $87.2 million Fair Values of Instruments:  Fair Values of Instruments Foreign Exchange Risk:  Foreign Exchange Risk Currency fluctuations may affect the costs that Newmont incurs at its operations Gold is sold throughout the world based principally on the U.S. dollar price, but a portion of Newmont’s operating expenses are incurred in local currencies The appreciation of non-U.S. dollar currencies against the U.S. dollar can increase the costs of gold production in U.S. dollar terms at mines located outside the United States, making such mines less profitable The currencies that primarily impact Newmont’s results of operations are the Australian and Canadian dollars During 2003, both currencies strengthened by an average of 17% and 11%, respectively, against the U.S. dollar. This increased U.S. dollar reported operating costs in Australia and Canada by approximately $76.2 million and $7.6 million Foreign Currency:  Foreign Currency Newmont acquired certain cross currency swap contracts in the Normandy transaction intended to hedge the currency risk on repayment of US dollar-denominated debt These contracts were closed out during the quarter ended June 30, 2002 for net proceeds of $50.8 million. The contracts were accounted for on a mark-to-market basis until closed out, resulting in a loss to income of $8.5 million for the period from February 15, 2002 through December 31, 2002 Newmont also acquired currency swap contracts to receive AUD and pay USD designated as hedges of AUD denominated debt. The contracts are accounted for on a mark-to-market basis with the change recorded in earnings Foreign Currency:  Foreign Currency To the extent that there are fluctuations in local currency exchange rates against the U.S. dollar, the devaluation of a local currency is generally economically neutral or beneficial to most operations since local salaries and supply contracts will decrease against the U.S. dollar based revenue stream The year ended December 31, 2003 included a foreign currency translation gain of $97.0 million amongst other things composed a $27.4 million mark-to-market gain on ineffective foreign currency swaps Interest Rate Swaps:  Interest Rate Swaps During the last half of 2001, Newmont entered into contracts to hedge the interest rate risk exposure on a portion of its $275 million 8.625% debentures and its $200 million 8.375% debentures The fair value of the derivative assets was $5.3 million at December 31, 2003 and the fair value of the hedge portion was $7.7 million and $16.9 million at December 31, 2003 and 2002, respectively The Company has managed some of its fixed rate debt exposure by entering into interest rate swaps Fair Values of Instruments:  Fair Values of Instruments Employee Stock Options:  Employee Stock Options The Company maintains stock option plans for executives and eligible employees Options to purchase shares of stock can be granted with exercise prices equal to or greater than the market value of the underlying stock at the date of grant The options vest over periods ranging from two to four years and are exercisable over periods of up to ten years At December 31, 2003, 11,767,961 shares were available for future grants under the Company’s employee stock plans Employee Stock Options:  Employee Stock Options Certain key executives were granted options that, although the exercise price was equal to the fair market value on the date of grant, cannot be exercised unless the market price of Newmont’s common stock is a defined amount above the option exercise price In addition, the same executives were granted options with exercise prices in excess of the fair market value on the date of grant These key executive options vest over a period of one to five years and are exercisable over a ten-year period At December 31, 2003, 89,863 of these options were outstanding and 44,931 were exercisable Slide53:  Founded in 1983 when three small mining and oil and gas companies were merged as Barrick Resources Corp. Barrick Gold Corporation engages in the production and sale of gold, including related mining activities such as exploration, development, mining and processing. Shares are traded under the ticker symbol ABX on the Toronto, New York, London and Swiss stock exchanges and the Paris Bourse. Corporate Profile Slide54:  Barrick Gold Corporation is among the world’s largest gold producers of market capitalization, gold production and reserves. North America's #2 gold producer behind Newmont Mining. Barrick's hedging practices, which have become its distinguishing feature, came under attack from investors in 2000, despite company estimates that it earned an additional $391 million through hedging in 1999 and another $300million in 2000. Corporate Profile Slide55:  Operations Operates a low-cost portfolio of 12 mines and four major development projects on four continents : North America, South America, Africa and Australia The Company’s development plan is expected to add four major new mines between 2005 and 2008. Together, these mines are projected to produce approximately 2 million plus ounces of gold annually Slide56:  In 2004 the Company’s 12 operating mines produced about 5 million ounces of gold (5.51 in 2003), at a cash cost of $212 per ounce ($189 in 2003), the lowest cash cost of all senior producers. For 2005, the Company expects gold production to be 5.4 to 5.5 million ounces at an average total cash cost of $220 to $230 per ounce. The Company increased its reserves by over 3 million ounces during 2004, with gold mineral reserves of 89 million ounces as at December 31. Operations Slide57:  Financials Public Company (NYSE: ABX; Toronto: ABX) Fiscal Year-End December 2004 Sales (mil.) 1,932.0 1-Year Sales Growth` -5.1% 2004 Net Income (mil.) 248.0 1-Year Net Income Growth 24.0% 2003 Employees 7,100 1-Year Employee Growth 4.4% The industry's only A-rated balance sheet with no net debt. Rank #468 in FT Global 500 and included in the TSX 60 Slide58:  Income Statement Balance Sheet Cash Flows Statement Financials Slide59:  Financials : Performance Today: US$ 25.600 EPS  0.46 P/E  55.70 52-Week High  26.320 52-Week Low  18.040 Indicated Slide60:  Risk Exposures Gold Price Risk Interest Rate Risk Foreign Exchange Risk Derivative Risk Credit Risk Market Liquidity Risk Mark-to-Market Risk Slide61:  Risk Management Philosophy Barrick is known as one of the more successful hedgers in the industry (the company estimates its hedging strategy has added more than $2 billion since the late 1980s) In 2003, Barrick implemented a no-hedge strategy the wake of rising gold prices - a significant departure from previous practice. Financial risk management has given the Company the ability to grow reserves and production, allowing it to significantly increase its leverage to the gold price. Barrick has more than four out of every five ounces of reserves currently unhedged. Slide62:  Barrick use derivative instruments to mitigate the effects of certain risks that are inherent in its business, and also to take advantage of opportunities to secure attractive pricing for commodities, currencies and interest rates. The inherent risks that Barrick most often attempts to mitigate by the use of derivative instruments occur from changes in commodity prices (gold and silver), interest rates and foreign currency exchange rates. Because Barrick produces gold and silver, incurs costs in foreign currencies, and invests and borrow in US dollars and is therefore subject to US interest rates, its derivative instruments cover natural underlying asset or liability positions. The purpose of the hedging elements of Barrick’s derivative program is so that changes in the values of cash flows from hedged items are offset by equivalent changes in the values of derivative instruments. Barrick does not hold derivatives for the purpose of speculation; its risk management programs are designed to enable Barrick to plan its business effectively and, where possible, mitigate adverse effects of future movements in gold and silver prices, interest rates and foreign currency exchange rates. Risk Management Philosophy Slide63:  Hedging Activities The main types of derivatives Barrick uses are: Forward gold and silver sales contracts. Interest rate swaps. Foreign currency contracts. Gold lease rate swap contracts. Slide64:  Barrick mainly use over-the-counter (“OTC”) derivative contracts. Using privately negotiated master trading agreements with its counterparties, Barrick is, in many cases, able to secure more favorable terms than if it used exchange-traded derivative instruments. Barrick has been able to negotiate these master trading agreements due to its credit standing and the quality and long-life nature of its mines and gold mineral reserves. Hedging Activities Slide65:  Barrick values derivative instruments using pricing inputs that are readily available from independent sources. The fair value of the contracts is mainly affected by, among other things, changes in commodity prices, interest rates, gold lease rates and foreign currency exchange rates. Hedging Activities Slide66:  Barrick use of these contracts is based on established practices and parameters, which are subject to the oversight of the Finance Committee of the Board of Directors. Barrick also maintain a separate compliance function to independently monitor its hedging and financial risk management activities and segregate the duties of personnel responsible for entering into transactions from those responsible for recording transactions. Hedging Activities Slide67:  Forward gold and silver sales contracts: These contracts provide for the sale of future gold production in fixed quantities with delivery dates at our discretion over a period of up to 15 years. Hedging Activities Slide68:  Interest rate swaps: These instruments are used to counteract the volatility of variable short-term interest rates by substituting fixed interest rates over longer terms on cash and short-term investments. Barrick also use interest rate swaps to swap our interest due on long-term debt obligations from fixed to floating, to take advantage of the present low interest-rate environment. Hedging Activities Slide69:  Foreign currency contracts: These instruments are used for the cash flows at Barrick’s operating mines and development projects from forecasted expenditures denominated in Canadian and Australian dollars to insulate them from currency fluctuations. Hedging Activities Slide70:  Gold lease rate swap contracts: These contracts are used to manage the fixed gold lease rate element of fixed-price forward gold sales contracts and to take advantage of lower short-term gold lease rates. Hedging Activities The End:  The End

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