INTERVIEW-Gold miners should consider investors in reserves math-BlackRock – by Silvia Antonioli and Clara Denina (Reuters India – January 13, 2014)

LONDON, Jan 13 (Reuters) – To attract shareholders in a climate of weaker bullion prices gold miners need to use more conservative price forecasts to determine how much ore is economical to extract, focusing on a return for investors rather than flat out production.

BlackRock fund manager Evy Hambro says miners have to shrug off habits formed when bullion prices were racing ahead in the last 12 years and to add a rate of return for shareholders when estimating production costs. Ideally that should be 20 percent.

At the beginning of each year gold miners calculate their reserves, or how much gold it is worth their while to produce, depending on their costs of production and based on average gold price assumptions.

This shift to refocus on shareholder return could mean reducing the amount of gold miners produce, but making profits on that output, rather producing gold that could end up being sold at a loss. Less focused miners could find themselves running short of investors.

Some investors have complained that miners’ price assumptions have been too optimistic in the last few years, while cost estimates have not included a rate of return for shareholders.

The 12 year gold price bull run until 2012 has in fact seen miners disregard higher costs for energy, labour and equipment over the years, as they sought to maximise production but ended up with rocketing exploration charges that eroded profits.

But in 2013 gold took a 28 percent plunge and gold miners’ shares fell by more than half on average, burning investors.

“(Mining companies) need to make their decision and then you can take a view on whether or not you are happy to support the management team but I do think the industry as a whole should use a conservative price assumption to calculate their reserves,” Hambro, investment chief for natural resources at BlackRock’s Gold and General fund, said in an interview.

“(That) price assumption should have a return rate built into it,” Hambro added. “Some gold companies, the better-run ones, use a price assumption which includes 20 percent rate of returns when calculating their reserves. That’s a very good way of doing it.”

In February 2013, the world’s largest gold producer Barrick Gold assumed a gold price of $1,500 an ounce for its 140 million ounces of reserves, while the second largest miner Newmont Mining assumed a price of $1,400 an ounce.

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