Brent Cook, the editor of Exploration Insights, noted in an interview recently that write-downs announced by a host of gold mining companies at the end of Q2/2013 were firstly more severe than anticipated by many analysts; and secondly, would be followed by further write downs later in the year when companies will have to prepare their resource and reserve statements for the annual reports. To be fair, a similar opinion was already offered here on Seeking Alpha early in April in the context of silver miners, but for the same reasons.
Reserves are in-situ metals with proven economic viability. In order to prove economic viability mining companies need to assume a gold price for which reserve calculations are made. The NI 43-100 recommends the 36-month average spot price for this purpose, so in theory gold price assumptions for reserve calculations should be fairly similar across the board. However, a quick non-representative scan of some larger gold miners reveals that there are significant differences. Yamana Gold (AUY) for example uses $900 or $950 per ounce of gold for most mines and Kinross Gold (KGC) mentions $1,200/ounce in the footnotes to its reserve statement. Moving up and starting to get dangerously close to the new normal of today's spot price of $1310/ounce at the time of writing we find Eldorado Gold (EGO) with assumptions of $1,250/ounce.
And here are the gold price assumptions that the three largest gold miners by market capitalization use for their reserve calculations: Goldcorp (GG) says it assumes $1,350/ounce, Newmont Mining (NEM) assumes $1,400/ounce and Barrick Gold (ABX) computed the latest reserve statement assuming a gold price of $1,500/ounce. All three of them use assumptions above the current spot price.
This list has been simplified in many ways and the footnotes to the resource and reserve documentation that we link to for each mentioned company provide much more detailed information. We encourage interested readers to actually read these [pdf] footnotes since they reveal a host of interesting information.
Traditionally gold miners publish updates to their reserve statements at the end of each year. Changes in the reserve numbers quite often have a significant impact on the share price. We would like to opine that numerous gold mining companies will need to adjust their gold price assumptions for this purpose to more realistic levels this year. This will automatically lead to reduced gold reserves since some ounces from last year's calculations will not be found to be economical any more. Add to this mix reductions in exploration spending that has been announced across the board and mine depletion by ongoing production and it becomes difficult to see how reserve levels can be maintained, especially by Barrick Gold who has based its last reserve statement on the most optimistic gold price assumptions among peers by quite some margin.
A substantial reduction in reserves would also need to find its way into the financial reports by way of impairment charges. And Barrick Gold might lead the way yet again when the time comes to do so, just like it did in Q2 when Barrick eliminated a whopping $8.7B from their books. We strongly believe that Barrick's woes are far from over and continue to steer well clear of this particular gold mining stock.