Managing Financial Markets Risk in Mining Projects

Most mining projects will involve some level of financial markets price risk. This is because commodities are generally traded in $US. The project will also incur costs in $A and if based in Australia will seek to generate a return in Australian dollars. Therefore the project faces commodity, foreign exchange and interest rates risk. As a business you may wish to maintain these risks within your business. However if the project requires financing to be provided then the financiers will want to ensure that there is a level of certainty attached to the cash flows to support the debt repayments. This is achieved by hedging the financial market risks. Traditionally the hedging process has been based on underlying assumptions within project models, which incorporate views on the direction of the underlying price risk. These views can be formed in an ad hoc manner. Gathering information from a variety of sources including economic forecasting and modelling, technical analysis, seeking market expert views. However, given the historical accuracy of such forecasts locking into long-term fixed hedging arrangements can create an inflexible environment that can restrict the opportunity to benefit from the underlying volatility of financial markets.