Designing Risk Management Framework for Companies in Gold-Mining Industry

The thesis is devoted to the analysis of the effectiveness of the market strategies of risk management based on the research of financial risks of the industry. The results obtained are necessary for the development of an efficient system of risk management of gold mining companies. The structure of this research consists of 3 parts. Chapter 1 contains the theoretical aspects of risk assessment and an urgent overview of the gold mining industry. Chapter 2 describes the risk assessment approach implemented in this paper, and the methodology of comparing effectiveness of various risk management strategies. Chapter 3 researches 10 leading companies, occupying 70% of the gold market, over 10 years, and outlines the results of the risk assessment and the efficiency of different management approaches. Applied in the thesis risk assessment is performed by measuring CFaR (Cash-Flow-at-Risk). The regression models with the dependent variable EBITDA determine the risk impact on cash flows. The inclusion of the independent factors in models is governed by the “exposure-based CFaR approach”. Evaluation of the effectiveness of risk management strategies presents by comparing the coefficients of risks determinants with the implementation of various hedging instrument. The study highlights the main risks of the companies in the gold mining industry: commodity, currency and interest rate risks. The analysis of risk management strategies of these companies leads to the following conclusions: the implementation of the “revenue stabilizer” (zero-cost gold collars) significantly reduces the risk of falling gold prices. Employing only forward contracts on gold or not hedging at all do not lead to the highest financial results of gold mining companies. We assume the effectiveness of applying options on the USD/RUB for reducing foreign exchange risks that was proven in earlier studies on the raw material extraction markets.