Abstract
The South African mining industry is an integral part of the domestic economy and the global commodity markets. Evidence in previous studies suggests that the mining industry tends to have high levels of exposure to price risks. As such, it is important to understand whether risk management pursuits against price risks are helpful in preserving the value of the South African mining firms. Specifically, this study aims to understand the implications of managing price risks through derivative-based hedging and how it affects the firm value of South African mining firms. Three research objectives are used to fulfil the research aim, which are, firstly, to classify the mining firms as either hedgers or non-hedgers, using a hedge percentage criterion. The second research objective is to determine if a hedging premium (or discount) exists in the firm value of mining firms that choose to hedge, using the non-parametric Wilcoxon signed-rank test. The final research objective is to determine if the hedging premium (or discount) to firm value continues to hold in the presence of control variables that have been documented as contributors to firm value. A multivariate panel regression model is used to fulfil the final objective, against the Tobin’s Q proxy for firm value. The research findings suggest that the South African mining firms tend to hedge against price risk 48% of the time on average. Furthermore, the firms classified as hedgers use derivatives to hedge against price risk 70% of the time, while firms classified as non-hedgers only use derivatives to hedge against price risk 20% of the time, on average. There were no significant differences observed between the firm value of the hedging firms and the firm value of the non-hedging firms, using the Tobin’s Q proxy. Furthermore, when subjected to control variables in the multivariate panel regression model, the relationship between derivative-based hedging and firm value failed to hold, as derivative-based hedging was found to be insignificant in affecting firm value. However, the variables that were found to affect the firm value of the mining firms were the debt-to-equity (D/E) ratio, the firm investments, the firm size, the management shareholding, and the return-on-assets (ROA).
Key words: Derivatives, risk management, hedging, firm value, Wilcoxon signed-rank, panel regression.