Gold sector nightmare not over: price drop forcing them to slash reserves

Despite extreme measures taken by gold miners to balance their books, the sector continues to suffer the aftermath of last year’s precious metal price nosedive and cost overruns at complex projects.

This week alone, three of the world’s top producers —Barrick Gold (TSX, NYSE:ABX), Goldcorp (TSX:G) (NYSE:GG) and Kinross (TSX:K), (NYSE:KGC)— reported a combined $16 billion in annual losses.

According to SNL Metals & Mining’s latest report, these miners are not alone. The analysts expect most of the other gold companies to follow suit as they continue releasing their year-end 2013 reserves statements this month.
While gold prices have partly rallied this year, companies are having to assume they will get lower prices for their output than a year ago. As a result, they are scrambling to reduce costs that soared during a decade of expansion in the industry.

“The reality is that our industry is cyclical and we need to provide returns in any price environment,” said yesterday Barrick’s CEO Jamie Sokalsky.

To examine the relationship between changing gold prices and how companies value their gold reserves, SNL looked at five of the 2012's top gold producers: Barrick, Newmont (NYSE:NEM), Goldcorp, AngloGold Ashanti (NYSE:AU) and Kinross.

For the end of each year between 2005 and 2012, the analysts took simple averages of the five companies' reserves calculation prices, their cash operating costs and their gold reserves grades, and compared them with the annual average gold price for each year.

Gold sector nightmare not over: price drop forcing them to slash reserves

During a period of steeply rising gold prices from 2005 to 2012, major gold miners increased their reserves calculation prices, somewhat below but largely in line with gold prices.

SNL found that cash costs to mine gold followed the upward trend, but stayed well below both the reserves calculation price and the actual rate, leaving healthy annual profit margins for the industry for most of the past eight years.

“Higher reserves prices also allowed the profitable mining of lower ore grades — including at mines considered marginally economic or uneconomic at lower market gold prices,” the report adds.

Everything changed at the end of 2012. Gold prices began falling, losing 27% in total last year. For the last 14 months, the sector has had to contend with uncertain demand, mostly driven by jewellery sales and financial instrument.

Gold sector nightmare not over: price drop forcing them to slash reserves

“With 2014 gold market price forecasts ranging between US$1,100/oz and US$1,400/oz, and little change in sight for 2015, gold producers will likely lower their forward-looking reserves calculation prices quite sharply in their year-end 2013 reserves statements,” SNL says.

The experts conclude the new reality may force miners to reduce production or simply shut down mines until gold prices improve, and even further divestitures of marginal mines.