June 23, 2013 2:00 pm

Gold miners face writedown pressure

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Gold producers face renewed pressure to write down asset values and clamp down on costs after the fall in the price of the precious metal.

Shares in a clutch of gold miners were among the equities worst hit after comments last week by Ben Bernanke, the US Federal Reserve chairman, suggested there would be a phasing out of the “quantitative easing” that has supported global liquidity and with it the price of gold.

Shares in Barrick Gold, the Canadian company that is the world’s biggest producer, touched their lowest level in two decades last week. In London, shares in Polymetal, a Russian producer, fell 12 per cent in Thursday’s sell-off, halving the company’s value since the start of the year.

The falls highlight the particular problems besetting gold miners even at a time when mining stocks are generally out of favour. “Gold has the biggest question marks over it of any metal. It was a very big beneficiary of QE and, as this gets withdrawn, emerging markets suffer and gold suffers,” Rajat Kohli, global head of mining and metals at Standard Bank in London.

Gold – and silver – “need to face up to life without QE”, analysts at Macquarie said.

Even before the sharp fall in the price of gold price this year, its miners were out of favour. Among the 40 largest mining groups by market capitalisation, four of the five that lost most value last year were gold producers – Barrick, AngloGold Ashanti, Goldcorp, and Newmont – according to research by PwC.

Those falls came in spite of a rising price last year, pointing to an issue hitting many mining groups: investor concern at how production costs have risen inexorably.

The same PwC research shows that from 2010 to 2012, the gross margins earned by the same four gold miners fell from 49 per cent to 29 per cent. “While high gold prices are generally good news for gold miners, margins matter even more,” said PwC.

In depth

Gold prices

gold price indepth

Gold prices have suffered their sharpest fall since the 1980s, heightening fears that the metal’s decade-long bull run has ended

Gold has fallen from almost $1,700 per troy ounce to below $1,300 within the past six months. Analysts at Westhouse in London said goldminers’ average all-in cash costs would be about $1,100 per oz produced this year, “suggesting limited potential for a prolonged period of [price] weakness below US$1,200/oz”.

Analysts point to two places where the pressure on miners could bring changes: in companies valuations of their own holdings, and in leadership.

This month Newcrest, Australia’s biggest producer, said it would write down the value of its assets by up to A$6bn. Analysts at Liberum in London said the persistent weakness and volatility of gold increased the likelihood of more such writedowns, with many companies announcing half-year results in coming weeks.

“It could be an extremely important and interesting half-year results season for resetting both production expectations and carrying values and we’d not be surprised to see a few more CEO casualties along the way,” Liberum said. Half of the five largest mining groups have changed chief executives in little more than a year.

Mr Kohli said some of the largest problems would be faced by junior gold miners that would find finance to continue projects almost impossible to raise. “Some are trading at valuations that attach no value at all to the assets they have,” he said. “It is inevitable that several will be forced to shut up shop.”

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