gold mine process

1. Gold Mining Industry
Cindy Chen
Julia Lee
Weiwei Sun
Patrick Tan
Johanne Lee

2. Gold Mining Industry
Overall Introduction
Structure of Industry
Financial Structure
Risk Assessment
Regulatory Environment (FASB)

3. Overall Introduction
Major Product
GOLD
Substitutes
–Direct Substitutes
–Indirect Substitutes
•Blooming economic
condition

4. Production Process (Tech.)
Exploration Exploration Drilling Open Pit Mining
Blasting Underground Mining Ore and Waste Haulage

5. Production Process (Tech.)
Heap leaching Milling Oxidization
Leaching Stripping Electro-winning

6. Production Process (Tech.)
Smelting Gold Bullion
Reclamation
Refining

7. Structure of Industry
Market Dynamics:
– Gold price change

8. Recent Change in Gold Price
Year 2000 – present

9. Structure of Industry (cont’d)
– Barrick Gold Corp.
– Newmont Mining
– Kinross Gold Corp.
– Meridian Gold
– Agnico-Eagle Mines
– Glamis Gold
– Goldcorp Inc.
– Cambior Inc.
– Ivanhoe Mines
– Placer Dome
•Major companies (selected by assets)

10. Financial Structure
Cost Structure
– Exploration, research and development
– General operation costs
– Depreciation, depletion and amortization
– Interest expenses
– Write-down of assets
– Other

11. Financial Structure
Revenue Composition
– Mining revenue
– Interest income revenue
– Financial activities revenue (ie. Hedging)

12. Risk Assessment
Nature of Mineral Exploration and Mining
Environmental Risks
Reserve Estimates
Worldwide Operations
Licenses and Permits

13. Risk Assessment (cont’d)
Interest Rate Risk
Foreign Exchange Rate Risk
Commodity Price Risk
Derivative Instrument Risk
- Credit risk
- Market liquidity risk
- Mark-to-market risk
Energy Risk

14. Risk Management Strategies
Use of derivatives on commodities
– Hedging on Gold
Use of derivatives or other financial
instruments on non-commodity items
– Not Hedging on Gold
– On fuel, interest rate and foreign exchange rate

15. FASB 133
Requires companies to recognize all derivatives
instruments as assets or liabilities in the financial
statements
Measured at fair market value
Classification of hedges:
– Fair Value Hedge
– Cash Flow Hedge
– Currency Hedge
– Non hedging derivatives

16. BARRICK Gold Corporation

17. Corporate Profile
Entered Gold Mining Business in 1983
Has operations in the United States, Peru,
Tanzania, Chile, Argentina, Australia and
Canada
Proven and probable mineral reserves of
86.9 million ounces of gold

18. Hedging Philosophy
Creates stable, predictable returns regardless of
short-term market conditions.
De-linking Barrick's earnings from the volatility
in the spot gold market.
Creates additional cash reserves that can be used
to acquire new assets to accretive to earnings.

19. Hedge Position
Barrick hedges approximately 18% of its
gold reserves.
– 16.1 million ounces or 3 years of expected
future production
Between 1991 and 2002, Barrick's forward
sales program allowed the company to
generate additional revenue of $2.2 billion

21. Risk Exposures
 Gold and Silver Price Risk
 Interest Rate Risk
 Foreign Exchange Risk
 Derivative Risk
a) Credit Risk
b) Market Liquidity Risk
c) Mark-to-Market Risk

22. Hedge Position
Current hedge position
Financial Statements Tour

23. Hedging Instruments
Spot deferred forward Contracts (90%)
Variable price Contracts
Options

24. Spot Deferred Contract
 The spot deferred contract is a commitment by the
producer to deliver a fix amount of gold to the contract
counterparty at a time in the future at a fixed price.
 The forward price of the contract is based on the spot
price on the date of the contract plus a premium
(contango).
 The contango is the difference between the LIBOR less
the gold lease rate.
 The difference between a spot deferred contract and a
simple forward contract is that the spot deferred contract
can be rolled over into a new contract on delivery date.

25. Spot Deferred Contract:
Features
The counterparties do not have unilateral and
discretionary ‘right to break’ provisions.
There are no credit downgrade provisions.
Barrick is not subject to any margin calls –
regardless of the price of gold.
Barrick has the right to accelerate the delivery of
gold at any time during the life of its contracts.
This flexibility is demonstrated by the terms that
allow Barrick to close out hedge contracts at any
time on two days notice.

26. Barrick’s trading agreement also specifies that the
counter parties can opt for early close out of their
contracts in the event of:
a material and lasting impact on Barrick’s ability
to deliver gold
the counterparties being unable to borrow gold to
facilitate the forward contracts
Barrick having a net worth of less than $2 billion
(currently 3.2 billion)
Barrick having a debt to net worth ratio of more
than 1.5-2.0:1 (currently 0.25:1)
Spot Deferred Contract:
Features

27. How It Works
Barrick
Bullion Bank
Central Bank
Barrick enters into the spot deferred contract with the Bullion
Bank.

28. Barrick
Bullion Bank
Central Bank
Bullion Bank borrows gold from the Central Bank
How It Works

29. How It Works
Barrick
Bullion Bank
Central Bank
Spot Market
Sells the gold in the spot market

30. Barrick
Central Bank
Interest earned 4%
Bullion Bank
1% lease rate
How It Works

31. Barrick
Central Bank
Bullion Bank
At the delivery date Barrick delivers the gold
How It Works

32. Barrick
Central Bank
Bullion Bank
Bullion Bank pays Barrick and returns the gold to the Central Bank
How It Works

33. Problems
Barrick faces huge opportunity losses should
gold prices increase
If gold lease rate rises above the Libor rate then
forward prices will be in backwardation
If Barrick’s counterparties are not able to borrow
gold to facilitate the contract Barrick can be
forced to deliver gold at an unfavourable price

34. Newmont Mining Corporation
Creating Value with Every Ounce…

35. Corporate Profile
Incorporated in 1921
Other than gold, also engages in the
production of and exploration for silver,
copper and zinc
Has operations in North America, Canada,
Australia, New Zealand, Indonesia,
Uzbekistan and Turkey
Owns 86.9 million equity ounces of gold

36. Creating Value with Every Ounce…
Growing reserves
Strengthening asset base
Increasing earnings per share
Paying higher dividends
Improving financial strength

37. Gold Sales
Gold sales are made at the average price
prevailing during the month, in which the
gold is delivered to the customer, plus a
"contango“
Revenue is recognized when the price is
determinable upon delivery with title
transferred to the customer

38. Hedging Philosophy
A non-hedger
Viewing gold as an equivalent to money
Creating paper gold is considered too risky

39. Risk Exposures
Commodity Price Risk
Foreign Exchange Risk
Interest Rate Risk

40. Commodity Price Risk
Metal prices fluctuate
– Due to demand, forward selling by producers,
central bank sales, purchases and lending,
investor sentiment, and global mine
production levels
Forward sales contracts with fixed and
floating gold lease rates

41. Foreign Exchange Risk
Subject to local currency exchange rates against
the US dollars
– A devaluation of local currency is neutral or beneficial,
and vice versa
Currency swap contracts
– To hedge the currency risk on repayment of US$-
denominated debt
Cross currency swap contracts
– To receive A$ and pay US$
– Designated as hedges of A$-denominated

42. Interest Rate Risk
Interest rate swap contracts
Against the interest rate risk exposure from
bonds, notes, debentures, and other debts
– A reduction in interest expense of $5.9 M
in 2002

43. Hedge Position
Currently working to eliminate the hedge
book inherited from the acquisition of
Normandy
– Hedging 80~95% of total reserves
About 10.3% of Newmont's proven and
probable reserves were subject to
derivative contracts

44. Fair Values of Instruments
Gold Commodity
Contracts
Ounces
(000)
Fair Value
(000)
Gold Forward Sales Contracts 3,332 (209,717)
Gold Put Option Contracts 1,544 (22,603)
Gold Convertible Put Options 1,459 (125,486)
Gold Sold Convertible
Put Options
240 (14,295)
Price-Capped Contracts 377 n/a
US$/Gold Swap Contracts 600 (87,200)

45. Fair Values of Instruments
Other Sales Contracts,
Commodity and Derivative
Instruments
Fair Value (000)
Cross Currency Swap Contracts (8,500)
Currency Swap Contracts (21,924)
Interest Rate Swap contracts 13,800
Fixed Rate Debt 1,075

46. Annual Report 2002

47. Financial Highlights
In 2002:
At an average realized gold price of $313
per ounce
Sold 7.6 M ounces of gold
Revenue of 2,745 million
Net cash of 670.3 million

48. Financial Highlights
Cash Flow Hedges
– Accumulated Other Comprehensive Income (Loss) of
(54.6M)
– Gain (Loss) on Derivative Instruments of (39.8M)
Under Financial Statement
Interest Swaps
– Interest, Net of Capitalized Interest is recorded as an
expense of 129.6M
Foreign Currency Exchange Contracts
– Dividend, Interest, Foreign Currency Exchange and
Other Income of 39.8M

49. Kinross Gold Corporation
“Timing is Everything”

50. Corporate Profile
Formed in 1993
The 7th largest primary gold producer in the
world
Highly leveraged to changes in the price of gold
A strict non-hedger (approximately 3.5% of
reserves hedged falling to zero by early 2005)
Majority of production in North America
Highest beta to bullion responses in a rising gold
price environment

51. Operating Highlights
888,634 gold equivalent ounces
Total cash cost US$201 per ounce
Net Loss per share US$0.32
Cash flow provided from operating
activities US$0.53 per share

52. Risk Exposures
Commodity Price Risks
Foreign Currency Exchange Risk
Interest Rate Risk
No Speculative or Trading Purposes

53. Commodity Price Risks
Financial instrument in use:
Spot deferred contracts
– 312,500 ounce @ $280
Fixed forward contracts
– Unknown
Written call options
– 150,000 ounces @ $326
– Recorded in the financial statements at each
measurement date.

54. Foreign Exchange Risk
Financial instrument in use:
Foreign exchange forward contracts
– Sell U.S. dollars and buy Canadian dollars
– CDN $25.8 million at an average exchange
rate of 1.5175
– Mature over a 12 month period

55. Interest Rate Risk
Financial instrument in use:
Interest rate swaps
– There are no interest rate hedging transactions
outstanding as at December 31, 2002.
– Probably due to lax monetary policy

56. Energy Price Risk
Financial instrument in use:
Crude oil forward purchase contracts
– As at December 31,2001
– Buy 28,500 barrels of crude oil forward at a
price of $20.83 per barrel.
– No hedging agreements in place

57. Fair Values of Instruments
In 2002:
$20.3 million recorded as loss on forward
contract
$0.8 million recorded as loss on foreign
currency contracts

58. Financial loss
Loss incurred from Interest and other
income
– $65.6 million
Share in loss of investee companies
– $12.9 million
Mark-to-market loss on call options
– $2.7 million (pg 88)

59. Comparison
Risk Management Philosophy
Barrick De-linking Barrick's
earnings from the volatility
in the spot gold market.
Newmont non-hedging philosophy
Kinross non-hedging philosophy

60. Recommendation: Barrick
To maintain its current hedge book
In-line with its hedging philosophy
Not cave in to shareholder pressure

61. Recommendation: Newmont
To keep reducing its hedge book to zero
In-line with its non-hedging philosophy
Not creating paper gold and thus
fluctuating gold prices

62. Recommendation: Kinross
To remain as a non-hedging firm
Since Kinross is small in size, relative to
others, one way to attract investor is to
offer higher beta to bullion price

63. Empirical Studies on Hedging in
Gold Mining Industry
Investors value volatility when it comes to
gold mining stocks
The more a firm hedges gold price risk the
worse it is for their stock return
Gold mining firms that aggressively hedge
gold price are not maximizing shareholder
value
~~Matthew Callahan, “To hedge or not to hedge…from
the North American gold mining industry”

64. Conclusion
Overall, a decreasing trend on hedging
position is observed

65. Any Questions?