Currency fluctuation is another term used for exchange rate volatility, which is the fluctuating value of a currency with respect to another currency due to various determinants such as interest rates, economic growth, inflation rates, and market sentiments. The scientific definition of currency fluctuation is random exchange rates, which create risks for businesses that operate across different nations and have revenues and expenses in different currencies.
Mining firms that conduct operations in more than one location are more vulnerable as a result of their commodities, such as gold, copper, and coal, being priced and sold in US dollars (USD), but their operational costs, including salaries, fuel, and supplies, being incurred using the currencies of the locations where the mining firms are operating. If there is a decline in the strength of the currency of the location vis-à-vis USD, then it makes for higher margins as the same number of dollars in revenue becomes more valuable in the local currency. The opposite happens if there is a strengthening of the currency of the location.
Operational and capital costs become volatile when the operations are conducted in various jurisdictions because items needed for the operations, including machinery and supplies, might be purchased using foreign currencies, but payment will be in terms of domestic currencies, resulting in higher opex and capex in situations where the domestic currencies are declining vis-à-vis foreign currencies. Such effects become pronounced especially in Africa, where there have been rapid depreciations, such as in the Zambian kwacha.
The repatriation of profits is yet another risk factor associated with foreign mining companies whose headquarters operate on stable currencies such as the United States Dollar, Canadian Dollar, or Australian Dollars. The effect of volatility during this process could significantly impact the profitability of the mining company since the home currency value of profits will fall in the event of a collapse of the host country’s currency.
This leads to problems in decision-making processes such as scheduling investments as well as difficulties in debt financing and valuation of shares. In case of mining companies operating within multiple countries, differences in the rate of inflation and monetary policy lead to mismatches between cash flows from different countries, leading to increased working capital and interest rates. It has been documented that the volatility in exchange rates results in negative impacts on mining outputs, investments, and employment levels.
In order to mitigate the effects of currency volatility, mining companies can hedge using strategies such as forwards, options, and natural hedges (such as local cost hedged against local revenue). The company can also use treasury management and scenarios in order to stabilize its cash flow. However, the premium on hedging may limit gains from this strategy, especially in developing countries like Africa.
