Gold News

Gold Mining: More Writedowns Ahead, But "Mistakes Being Fixed"

 
Falling gold price hits value of mining assets, forces writedowns and cost cutting across the sector...
 
BADLY dented by the falling price of gold, many gold mining companies face having to write down the value of assets bought during the last decade's bull market say mining analysts.
 
"[Mining] assets acquired at peak valuations are especially vulnerable to write-downs," says a note issued Tuesday by credit ratings agency Fitch.
 
Gold mining companies spent some $195 billion over the last decade buying smaller companies and other mine projects, says Bloomberg. The peaking gold price of 2011 alone saw what consultants PwC called " a blockbuster year" of mergers and acquisitions in the sector, with corporate deals totalling $149 billion.
 
"Many companies at last assessment valued their gold reserves [in the ground] at prices at or higher than $1300 per ounce," Fitch adds. Today the gold price fell to a 34-month low of $1230 per ounce.
 
Following this month's potential $7 billion writedowns of the value of mine assets owned by Newcrest – the world's third largest gold-mining producer – "We would expect that there would be several, if not many [gold mining] companies, who would also in the next reporting period be coming to a list of impairments," says Michael Elliott at the global mining practice of consultants Ernst & Young.
 
"It's just a question of timing, and who had the largest exposures."
 
Newcrest's writedown announcement of 7th June is now under investigation following allegations of improper disclosure. Shares in the Australia-based gold miner lost 12% over the two days before the impairment plans were made public.
 
Look ahead, however, the current wave of asset-value writedowns "is manageable" from a credit-rating perspective Fitch says. That's because the reassessment of mine projects valuations is a "non-cash, non-credit event" driven instead by the gold price.
 
Moreover – and after failing to capitalize on the decade-long bull market by extending the life of older, existing projects rather than opening new sites – gold mining companies "are beginning to act to rectify their mistakes," says Catherine Raw, co-manager with Evy Hambro of the highly respected Blackrock Gold & General Fund.
 
Costs are being cut, starting with executive pay rises and bonuses being capped or scrapped. Dividends have been raised and share buy-backs have further returned cash to shareholders. 
 
"We have already seen cuts to capital budgets and an increasing focus on costs," agrees Fitch. But a drop in the gold price below $1000 could force a cut in shareholder dividends, as well as a move to more gold mining companies "look[ing] to shed assets."

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