Newmont Mining is the largest gold producer in North America and second largest in the world, with mining interests in the U.S., Mexico, Peru, Uzbekistan, and Indonesia. In 1998, Newmont produced 4.07 million ounces of gold, and its proven and probable reserves total 52.6 million ounces.
The price of gold is usually inversely related to the performance of financial assets such as stocks and bonds. Gold mining shares often provide a leveraged exposure to movements in gold price and, thus, are a convenient hedge against downturns in financial markets, especially those precipitated by inflation. However, gold prices have been in a secular downtrend for the past 18 years and especially in the past 3 years-gold prices fell from around $400 an ounce in early 1996 to around $250 an ounce by mid-1998. The prolonged bear market in gold has driven many gold-mining companies out of business. Many other companies have attempted to mitigate their exposure to the decline in gold prices with a variety of derivative instruments such as forward sales, and the purchase and sale of gold options. Some large companies such as Barrick Gold, Placer Dome, and Ashanthi Gold Fields have hedged major portions (upwards of 50% in some cases) of their gold reserves. While these hedging strategies reduce downside risk, they also limit gains from a sustained rally in the price of gold.

a. Describe and analyze the hedging transactions of Newmont. What is Newmont's motivation for each of its hedging transactions?
b. Explain how each of the hedging transactions entered into by Newmont will be classified and accounted for under GAAP.
c. Examine the underlying economics for each of its hedging transactions. Does the accounting (both under GAAP and the earlier method employed by Newmont) reflect economic reality?
d. Newmont is not allowed to use hedge accounting for the written calls. Is this appropriate?
e. Evaluate Newmont's criticisms of the accounting for its written calls. Is Newmont's criticism justified?
f. What is the underlying economic reality of the sudden increase in gold price for Newmont? Do its financial statements reflect economic reality? Would marking all assets and liabilities to fair value improve the presentation of its balance sheet and income statement?

  • CreatedJanuary 22, 2015
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