Metal Mining Company


Background: 

Our client was a multinational base metal mining company, with operations in Canada and the United States. With many of its commodity exposures (both inputs and outputs) priced in USD, and operations throughout Canada and the US, the company was significantly exposed to volatility in the USDCAD exchange rate (which was identified as its single biggest risk factor), in addition to several direct commodity price risks. Our mandate was to conduct an analysis of how FX risk impacted the company (including the implications of the relationship between FX and commodity price risk), review several specific risk management strategies, and recommend an optimal risk management solution for the business.

 

Our Approach: 

We began by spending several days at the company’s US headquarters, interviewing key staff members including the CEO, CFO, the treasury and risk management team, as well as business division representatives and plant managers. This review yielded significant results, including the identification of natural hedging opportunities that were not previously considered, as well as highlighting the fact that the different business units were impacted by FX risk in very different ways, due to the vastly different dynamics of their individual markets. 

 

Validus then constructed a quantitative model of the market risks (FX and commodities) facing the company, ensuring the relationships between commodity prices risk and FX risk were considered. Various hedging strategies were designed and the impacts of these strategies on criteria such as free cash flow and profitability were measured. A comprehensive report outlining the risks, describing the possible hedging strategies (including costs and benefits), and clearly demonstrating the impacts of these strategies on both cash flow and bottom-line profit was delivered, culminating in a clear recommended hedging strategy for the business.

 

The Result: 

Following the completion of our analysis, we presented our conclusions and recommendations to the board of directors, and a decision was made to execute our suggested solution for the upcoming financial year.  Our findings resulted in a net reduction of required notional hedging of over 30%, due to the natural hedging opportunities that were uncovered, as well as the ability of certain business units to pass through the impact of FX volatility.  This enabled the company to reduce its cost of hedging by over one third (an annual saving of approximately USD 1.1 million), whilst simultaneously reducing the impact of FX volatility by over 45% (as measured by a reduction in both Cash Flow at Risk (CFaR) and total notional exposure).  







 

White Papers


 

FX Hedging:

10 Common Pitfalls

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Commodity & FX Risk:

An Integrated Approach

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The Corporate Use of Credit Derivatives:

Where Next?

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Corporate Hedger’s Guide to Basel III

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Currency Volatility – Are markets nearing an inflection point?

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Testimonial

FX Risk

 

“Validus designed an innovative and practical hedging strategy to address our underlying FX risk in the context of very distinct and diverse sources of competition. We are delighted with the outcome and impressed with their on-going response to the changing business and market dynamics”.

 

Paul Stobbs, Managing Director, Attraction World

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Private Equity

 

 “The Validus team understand how private equity thinks about financial risk management issues and they are rigorous in the way they help our portfolio companies to understand and mitigate their risks.”

 

James Markham, Partner – Portfolio Management, Graphite Capital LLP

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FX and Commodity Risk

 

“Validus provides us with independent strategic advice relating to our long-term currency and commodity risk management program.  The people are extremely capable and collaborate very well with our finance and operations teams here at JD Irving.”

 

Mark Bettle, Director, J.D. Irving Ltd.

Testimonial

FX  Risk

 

 “Validus developed a tailored hedging solution to mitigate the risks from our unique combination of existing supplier agreements. The implementation and management of this rolling hedging programme with our FX service providers has been expertly and efficiently handled”.  

 

Mark Goldby, Finance Director, SMS Electronics Ltd.

Testimonial

Commodity Risk

 

“Validus worked with us to develop a comprehensive commodity risk management programme – their analysis was both insightful and actionable.   We particularly value their independence, and they continue to work alongside our internal team to ensure our commodity price risks are managed effectively”


Gerry Gray, Finance Director, Strix Ltd.


Testimonial

FX, Commodity & Interest Rate Risk

 

“Validus comes up with risk management solutions that are innovative and comprehensive but practical to implement, that is their strength compared to other consulting companies we have worked with in the past.  Validus provided valuable insights into how FX, interest rate and commodity risks impact our organisation, and provide actionable recommendations and solutions.”

 

Andrew Ayres, Finance Director, U-POL Ltd.

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