The gold mining sector is braced for asset writedowns and a fall in the amount of reserves in the ground after the precipitous drop in the price of the metal this year.
Some of the world’s largest gold miners face having to tell investors that their growth has gone into reverse because the falling price has made it uneconomic to mine some of the areas previously classed as reserves. Miners’ reserves are vital to their prospects and valuations, since companies would quickly shrink if they did not replace what they dug from the ground each year. Rising price expectations have until now helped gold miners be more optimistic about their reserves and to include ounces that they would previously not have been able to mine profitably.
“Gold has been going up for 12 of the last 13 years and reserves have gone up with the price. This  is definitely the year we will see reserves falling across much of the sector,” said Jorge Beristain, an analyst with Deutsche Bank. “Reserve calculations have been based on a series of suppositions that in the present environment are no longer tenable.” Gold miners including Barrick Gold and Newmont Mining, the world’s largest by ounces of annual production, have had a difficult year in 2013 because of the effect of the gold price on some of their most important projects.
Miners usually update their reserve statements early each year, and do not all assume the same price. Barrick’s last reserve statement assumed a gold price of $1,500 per ounce for most of its 140m oz of reserves, while Newmont based its statements on a $1,400/oz price. Gold started the year at about $1,600/oz but fell sharply in April and has been hovering at about $1,200/oz in recent days. Newmont, whose 99m oz of reserves are the industry’s second-largest, said early this year that a $100 fall in the gold price would cut reserves by 7.6 per cent. Barrick has previously said a $300/oz change in the assumed gold price would see its reserves fall less than 10 per cent, with a lower impact at its larger, more important mines. “I would guess some miners might have to use $1,100 as the price for their reserves,” says a senior executive at one UK-listed company. “Or they might take the view that the gold market is in a very strange place in terms of volatile behaviour at the moment, which they might use to justify using a higher price.”
Some miners use lower gold prices in reserve calculations. Kinross Gold, a large Canadian miner, based its latest reserves on a $1,200 price. Barrick and a number of other gold miners including Newcrest Mining, Australia’s largest, have already made billions of dollars of writedowns during 2013 as the gold price fell. However, some miners face having to acknowledge further impairments connected to goodwill held on their balance sheets or the carrying value of projects.
“The writedowns of the past quarters in 2013 have tended to be connected with the costs of projects. What we are talking about now is cuts to the value of companies’ land holdings and the gold that they hope is in the ground,” Mr Beristain said. Silver miners also face writedowns and reserve cuts because their price assumptions are well above current spot prices, he added.