Comprehensive Financial Risk Management Analysis for Medusa Mining Ltd

This report provides a comprehensive financial risk management analysis for Medusa Mining Ltd. It identifies key risk exposures including commodity market risk (gold and copper prices), interest rate risk (LIBOR), and foreign exchange risk (AUD/EUR and AUD/USD). The analysis uses figures to illustrate market trends and their impact on the company's operations. The report recommends hedging strategies for each risk, suggesting hedging percentages for gold and copper production, full hedging of interest rate payments, and 50% hedging in USD to mitigate foreign exchange risk. The recommendations aim to reduce potential losses and improve the financial stability of Medusa Mining Ltd.

Running head: FINANCIAL RISK MANAGEMENT
Financial Risk Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Section I:....................................................................................................................................2
a) Identifying the specific financial risk exposure faced by Medusa Mining Ltd:....................2
b) Making firm recommendations on whether to hedge all parts or none of the financial risk
exposures:...................................................................................................................................6
References:.................................................................................................................................7

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Section I:
a) Identifying the specific financial risk exposure faced by Medusa Mining Ltd:
There are different levels of Financial risk that could be identified from the operations
conducted by Medusa mining Limited. In addition, the overall risk needs to evaluated for
reducing the overall operational risk of Medusa mining Limited. There are different levels of
risk such as commodity market risk, interest rate risk, and foreign exchange risk, which
relatively hampers the overall position of the organisation. The identify the financial risk
exposure of Medusa Mining Limited are adequately evaluated in the following measures.
Commodity Market Risk:
Figure 1: Depicting the Gold Spot Price
(Source: Provident Metals Online 2018)
The above figure relatively represents in the overall gold spot price of in the
commodity market which could directly affect the operational capability of Medusa mining
Limited. The overall decline in gold prices can be identified from the above figure which
relatively increases the risk exposure of the organisation. the expected production from July
to December is a relatively at the levels of 14,200 ounce, where the change in gold prices

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would directly impact the overall profit of the organisation. From the evaluation of the above
figure it could be identified that the gold prices have a relatively declined from $1340 to
$1242.60, which is directly affecting the overall profitability of the organisation. This
continuation of the decline in gold price would directly affect Medusa mining Limited overall
revenues during July 2 December due to the low income from gold mining.
Figure 2: Depicting the Copper Spot Price
(Source: Provident Metals Online 2018)
The second risk exposure of Medusa mining company limited is from the declining
prices of copper, which can be evaluated from the above figure. The company is seeking to
produce 3,800,000 pounds of copper from July to December. However, the declining prices
of copper from January relatively indicates for downtrend, which could directly impact the
profitability of the organisation. furthermore, the prices of has fluctuated around 20% over
the past 12 months which indicate the high volatility in the prices of the commodity.
Therefore, adequate measure needs to be imposed by Medusa mining company for reducing
the risk of loss from copper production.
Interest Rate Risk:

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Figure 3: Depicting the US Dollar Libor Rate
(Source: Tradingeconomics.com 2018)
The third risk exposure can be identified, as the interest rate risk, which directly
impacts the overall interest payments of Medusa mining Limited. In addition, the interest rate
relatively impacts the bank loan of USD $600 million that is taken by the company to support
its overall operations. The interest on USD $600 million is at a floating rate price of 2.5%
above the US dollar LIBOR rate, which relatively increases the risk of interest rate for the
organisation. The continuous increment in the overall LIBOR interest rate would eventually
raise the level of interest payments by the organisation. The continued increment in US dollar
LIBOR interest rate over the 12 months delivery in the case that relevant hedging has needs
to be conducted.
Foreign Exchange Risk:

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Figure 4: Depicting the AUD/EUR value
(Source: Xe.com 2018)
Figure 5: Depicting the AUD/USD value
(Source: Xe.com 2018)
From the valuation of the above currency exchange rate of AUD against USD and
EURO relatively indicates the awakening power of Australian currency. Hence, the

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organisation needs to effectively hedge against the loan repayments that needs to be
conducted in USD and EURO.
b) Making firm recommendations on whether to hedge all parts or none of the financial
risk exposures:
From the evaluation of gold prices, it could be identified that there is a good
opportunity to secure the price of gold now to fix the profit level of the organisation.
Therefore, any decline in the cost would directly impact operational capability of the
organisation. Moreover, hedging 80% of the gold exposure would eventually help in reducing
the losses that my income due to declining prices. However, 20% of the gold exposure will
not be hedged to benefit from the rising prices of gold.
Therefore, after seeing the overall risk exposure in copper commodity the
organisation needs to hedge 90% of the copper production, due to the continuous decline of
the copper price. On the other hand, 10% of the copper production needs to be unhedged for
increasing the profits of the organisation due to the positive change in copper price.
The company needs to fully has the interest rate payments to 3-month US dollar
LIBOR interest loan to lock the current interest rates and fix the interest payments of the
organisation. Moreover, no changes between the interest rates of European variable rate loans
is identified, therefore no hedging is required.
Moreover, Medusa mining company needs to conduct a 50% of hedging in USD for
reducing the risk from declining Australian currency and improving the financial stability of
the organisation.

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References:
Provident Metals Online. (2018). Today's Copper Price: Copper Spot & Historical Prices.
[online] Available at: https://www.providentmetals.com/spot-price/chart/copper/ [Accessed 8
May 2018].
Tradingeconomics.com. (2018). US Dollar LIBOR Three Month Rate | 1986-2018 | Data |
Chart | Calendar. [online] Available at:
https://tradingeconomics.com/united-states/interbank-rate [Accessed 8 May 2018].
Xe.com. (2018). XE: AUD / EUR Currency Chart. Australian Dollar to Euro Rates. [online]
Available at: https://xe.com/currencycharts/?from=AUD&to=EUR&view=2Y [Accessed 8
May 2018].
Xe.com. (2018). XE: AUD / USD Currency Chart. Australian Dollar to US Dollar Rates.
[online] Available at: https://xe.com/currencycharts/?from=AUD&to=USD&view=2Y
[Accessed 8 May 2018].