Based on recent headlines, non-financially-aware observer could be forgiven for thinking mining gold is a sure way to lose money, not to make it. Take the following batch from Mineweb over the past couple of weeks: Barrick cuts reserves 26%; reports $10.34 billion loss. Goldcorp reports $2.71 billion loss; cuts reserves 15%. Newmont Mining reports $2.5 billion loss for 2013. Kinross Gold reports $3B loss: 33% cut in GEO reserves – to name the most recent. Overall, the world’s top 5 gold miners between them made book losses of some $20.8 billion in 2013. The smaller members of the Top 10 gold mining club who have reported to date all also made book losses, but not quite on the same scale, commensurate with their smaller outputs.
Table: World’s top 10 gold miners – 2013 FY losses after impairments.
|1. Barrick Gold||$10.3 billion|
|2. Newmont Mining||$2.5 billion|
|3. AngloGold Ashanti||$2.3 billion|
|4. Goldcorp||$2.7 billion|
|5. Kinross Gold||$3.0 billion|
|7. Gold Fields||$214.4 million|
|8. Polyus Gold||N/A**|
|9. Yamana Gold||$446.2 million|
|10. Agnico Eagle||$406.5 million|
*Newcrest has a June 30 year end
** Polyus Gold is not due to report 2013 financials until late March
What may surprise the unsophisticated observer is that despite these enormous book losses, the companies have mostly still been able to pay dividends to shareholders, and also, in most cases, their stock prices are substantially higher than they were in December last year due to the rise in the gold price over this period. Such is the nature of modern day accounting! Indeed, in operating terms the miners are virtually all profitable, although not perhaps at the levels seen when the gold price was rather higher back in 2011/12.
We did warn of the kind of dire year facing the gold miners here on Mineweb back in July last year, but there was no great expertise involved in so doing given the ongoing dive in the gold price and the beginnings of the taking of the massive impairment charges we have been seeing.
Most of the impairments taken though just relate to revaluations of reserves as the miners rebase the gold price levels at which these reserves have been calculated – and in many cases also from operational restructuring, changes in forward mine plans and deferments in capital projects.
But will these losses be replaced by huge billion dollar gains should the gold price pick up again? One doubts this. Most of the big gold miners (with the exception of Goldcorp among the top 5) have seen their CEOs replaced – in some cases as scapegoats for full board decisions which proved perhaps misguided in a falling gold price scenario. Pressures from institutional investors and shareholders meant heads had to roll – and they certainly did, although this wasn’t unique to the gold sector with many base metal and diversified miners suffering the same CEO culls due to weaker metal prices as well.
The new gold miner CEOs who have come in will be keen to take these swingeing impairments early in their reigns. With the benefit of hindsight, they will likely keep the gold price assumptions on which future planning, reserves and resources are based as low as is considered feasible so they don’t get caught out by a sharp gold price fall again – and lose their heads in the fallout like their predecessors.
The big falls in reserves and resources noted in the headlines are not real. The gold deposits are still there but are just a little less likely to be brought into future production plans without some very big gold price increases – for the time being at least. A cautious approach going forward is very much the order of the day – and while this will naturally have an impact down the line on future production and reserve levels, and by so doing perhaps have a longer term positive gold price impact by reducing longer term gold production patterns – for the biggest miners this will have little immediate financial impact on day to day earnings. Indeed by deferring capital and exploration spending it should have the short term effect of improving the bottom line at the expense of longer term valuations, although these will actually be little changed on a discounted cash flow basis with the resultant likely production shortfalls being many years ahead yet.
What will this mean for the shareholder in the major mining companies? While the headline losses may well have seemed frightening when they were announced, the cautious approach to day to day operations, and the effects on earnings, as noted above, should keep financials perhaps in a healthier state overall than they have been for some time past where growth at any cost seemed to be the main management aim. Assuming the gold price does not collapse, then the mega gold miners could be in for a sustained period of earnings growth provided they keep to their current cost cutting mantra. It may affect earnings in the years ahead, but investment nowadays seems to be more about short term gains than long term growth. Perhaps a very short-sighted approach but one built more and more into the investment psyche, particularly of the big institutional funds who seem to have such an undue influence on mining company board decisions.