Q5. Hedging can increase the firm value in the short and long run. Hedging is a lot simpler in short run compared to long run. The biggest problem that arises in planning to hedge in the long run is the cost of hedging. The cost of the financial derivatives increase significantly as they go beyond 1 year mark. So for our analysis of the Newmont Mining Corporation’s long term hedging strategy we will prefer Operational hedging over financial hedging.

As Chowdry and Howe (1999) suggest that firms are likely to use financial instruments to a greater extent to hedge short term exposure and rely on operational hedging more heavily to hegge long term exposure. But in other empirical studies such as Allayannis , Ihrig and Weston (2001) and Kim, Mathur and Nam (2005), the researcher concluded that the operational hedging can only be a compliment to financial hedging and cannot substitute it. So as a long term strategy we have devised a mix of operational hedging and financial hedging, but operational hedging being more crucial due to its effectiveness and cost benefit in the long run.

Below are the hedging strategies that we will use .

Operational Hedging StrategiesGold LoansThe best way to align your liabilities and revenues to take the gold or bullion loan. This is a classic operational hedging strategy where the company can minimize the risk of going into financial distress. This strategy would shield NEM from experiencing gold rate exposure that could see their debt in dollars to elevate to uncomfortable levels. So taking loans in gold or gold bullions in the future can be a big risk minimizing strategy.

DiversificationDiversification is another operational hedging strategy where NEM can benefit. NEM can look into expanding into its copper production and reduce the gold production percentage, currently at 80%, to a more moderate number. We think this strategy is a difficult one to implement in the short run and it needs some time to be effective. Still as an operational hedging strategy we will recommend NEM to slowly diversify into more areas as well.

Financial Hedging StrategiesFutures ContractsAs we agree that financial hedging and operational hedging compliment eachother, we will also use futures contracts. Futures contracts minimize the loss in case of a price drop. The futures contract obligates the buyer to buy at a set price and date. So NEM can mitigate the risk of loss by going into a futures contract and setting the price for the sale. The benefit of using futures contract is that NEM can hedge its sales and avoid the hefty premiums that it would have to pay if it went for options to hedge.

As far as other financial derivatives like options are concerned, we don’t plan to use them as a long term hedging strategy. The premiums on options for a 1 year plus period are huge and it is financially inwise to buy the options. We will be using those financial derivatives as an insurance policy in the short term. But for the long term we will be confining a mix of the three strategies stated above.