Posted: August 2nd, 2015

Barrick and Golds own the Bulyanhulu mine in Tanzania and the Karlgoolie mine in Australia.

Barrick and Golds own the Bulyanhulu mine in Tanzania and the Karlgoolie mine in Australia. The attached table reports information on the selling prices and costs for the two mines, Barrick s selling price of gold differs from the spot price as some production is sold through a long time contract and also owing to the company s use of hedging. The average cash cost includes operating cost, royalties, and taxes, while the average cost includes the cash cost as well as amortization.
Bulyanhulu Kargoolie
2002 2003 2004 2004
Production (thousand ounces) 356 314 350 444
Selling Price ($ per ounce) 339 366 391 391
Average Cash Cost ($ per ounce) 198 246 284 234
Average Cost ($ per ounce) 300 369 384 278
a) Suppose the Bulyanhulu mine always produces at the scale where its marginal cost equals the selling price of gold. Its marginal cost curve however, shifts with changes in electricity process, wages and other factors. Using the data from attached table illustrate the shifts in Bulyanhulu s marginal cost curve, the selling price, and profit maximizing scale of production between 2002 and 2004. ( No need to draw table shifts if able to explain the shifts)
b) In 2003, Barrick continued to produce from the Bulyanhulu mine even though the selling price of gold $366 an per ounce was less than its average production cost of $369 per ounce. Was this a mistake? Please explain why or why not.
c) Use Barrick s 2004 data to compare (i) short run break even conditions for Bulyanhulu and karlgoolie and (ii) the long run break even conditions of the two mines.

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