The Collapse of Pasminco: Misjudgment, Misfortune and Miscalculation

35 Pages Posted: 26 Jun 2006 Last revised: 16 Jan 2008

See all articles by Christine A. Brown

Christine A. Brown

Department of Banking and Finance; Financial Research Network (FIRN)

james ma

University of Melbourne - Department of Finance

Date Written: January 2007

Abstract

In September 2001 when Pasminco Ltd was placed in voluntary administration, it was the world's biggest zinc producer with over ten percent of global output. This paper examines the hedging strategies that Pasminco had in place in the years leading up to the firm being declared insolvent and documents the financial factors that contributed to the corporate collapse. We reconstruct the company's cash flows from its annual reports and measure market risk using a Value-at-Risk metric. This case study illustrates in stark terms that the company's hedging strategies did not materially reduce the exposure to market risk or the probability of financial distress, and were a major contributing factor to the company's downfall. Disastrous hedging strategies are not an uncommon occurrence in the resource sector. The case study has valuable lessons for companies facing quantity and exchange rate risk.

Keywords: Value-at-risk, hedging, exposure, market risk

JEL Classification: G30, G32

Suggested Citation

Brown, Christine A. and ma, james, The Collapse of Pasminco: Misjudgment, Misfortune and Miscalculation (January 2007). Available at SSRN: https://ssrn.com/abstract=911510 or http://dx.doi.org/10.2139/ssrn.911510

Christine A. Brown (Contact Author)

Department of Banking and Finance ( email )

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Clayton, Victoria 3800
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Financial Research Network (FIRN)

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Australia

HOME PAGE: www.firn.org.au

James Ma

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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