Gold Price Plunge Saddles Miners with Billions Worth of Writedowns

July 22, 2013 at 09:50

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AngloGold Ashanti, the world’s third biggest gold producer, last Monday revealed itself as the latest to take a hit, predicting a writedown in the range of $2.2bn (£1.5bn) to $2.6bn (£1.7bn) on its mining assets, including its stockpiles of ore. The figure will be revealed in its financial results for the second quarter.

The company also said it would produce 4m to 4.1m ounces of gold this year, rather than the 4.1m to 4.4m ounces previously planned, in response to the fall in its product’s price.

“In light of lower and more volatile gold prices, capital expenditure is being focused on the group’s highest quality assets, while curtailing spending or suspending operations at projects that may yield lower returns,” it said. “In addition, we may seek partners for certain of our projects.”

The update hinged on the more than 30pc drop in the gold price from its peak of $1,900 (£1,243) in 2011, as the global recovery gains traction and central banks appear to signal an end to their inflationary stimulus efforts. Gold ended last week trading around $1,295 (£847) an ounce. Gold miners are feeling the pain as a result. Last month, Barrick Gold, the world’s biggest producer, said it expects to write as much as $5.5bn (£3.6bn) off the value of a delayed mining project in Latin America.

Newcrest Mining, Australia’s biggest producer, meanwhile reported it might take a charge of as much as Australian $6bn (£3.6bn), which would be the largest in the gold sector’s history.

Harmony Gold, the South African miner, has also announced that it would write down the value of its Hidden Valley mine in Papua New Guinea.

They will be far from the last to have to make such statements, analysts warn. “It [the phenomenon] is yet to filter down to the mid-tier producers in a meaningful way ahead of reporting season,” say analysts at Liberum Capital.

“Gold and silver’s persistent weakness increases the likelihood of writedowns as the half year results and auditing season approaches and as the gold miners revalue operations, stockpiles and inventories.”

In the UK market, they see the precious metals stocks most exposed to potential writedowns during the second half of this year as African Barrick Gold, Petropavlosk and Polymetal.

Those operating in South Africa, such as AngloGold Ashanti, look particularly vulnerable. The group’s writedown last week emerged as gold mining companies in the country offered their workers a 4pc increase in wages – representing an effective pay cut, as inflation is running at 5.6pc. Unions want much higher increases in wages.

“The NUM, which is regarded as a moderate union, is demanding a pay increase of up to 61pc, while the radical AMCU is calling for wages to be more than doubled,” write analysts at Commerzbank. “The mining companies, which have their backs against the wall in any case on account of the fallen gold prices, are unable to meet such unrealistic demands.”

Christopher Louney, a Barclays analyst, calculates that as much as 17pc of South African production would be “underwater” – operating at a loss – if gold prices average around $1,200 (£785) an ounce as he expects for the third quarter of this year.

The miners are taking action. Fresnillo, the London-listed miner, on Wednesday said that its chairman and non-executive directors’ salaries would be cut by 30pc, while its chief executive would take a 10pc drop in earnings.

As well as cutting costs, they are reported to be returning to their old practice of hedging – selling their future product at set prices to protect against a falling gold price. While gold was on its 12-year bull run, the habit fell out of favour, but no more, it seems.

The big question, of course, amid such a fall, is: are gold miners now poised for a rebound? Perhaps not yet.

Further writedowns and cuts to dividends look likely.