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Kinross Gold Corp. did the unthinkable last year: it consciously decided to own less gold. The Toronto-based gold miner went against conventional wisdom by maintaining a price of US$1,200 an ounce to calculate reserves, and US$1,400 for resources.
Given gold was closer to US$1,700 and on the way up, rivals were using much higher prices and, as a result, adding more low-grade ounces into their mine plans and boosting reserves.
The opposite happened to Kinross: its reserves fell by three million ounces. That is a traditional no-no in the gold sector, especially when prices are on the upswing.
“That was a tough decision, to hold the line and shrink the resource,” chief executive Paul Rollinson said in an interview last year. “But the good news is we created value because we’re not chasing those last marginal ounces at the bottom of a pit.”
Today, the other gold mining CEOs only wish they followed Kinross’s lead a year ago, because they are about to pay the penalty for being too aggressive back then.
Most of the big North American gold miners report year-end results this week, and, thanks in part to the reserve issue, they could be a huge mess.
Put simply, the gold miners did not see last year’s 27% price plunge coming. With the exception of Kinross, their reserves are calculated based on prices far higher than the current one (roughly US$1,250 an ounce). For example, Barrick Gold Corp.’s reserves are calculated at US$1,500, Goldcorp Inc. uses US$1,350, and Newmont Mining Corp. is at US$1,400.
These numbers are going to come way down in the year-end results. Barrick, for instance, has already said it will re-calculate reserves at US$1,100. The result will be lower reserves, shorter mine lives and, potentially, more impairment charges. That may seem inconceivable for investors after the sector recorded more than US$30-billion in writedowns during the past three years, but that is where the miners find themselves.
“You would think that after the tens of billions of writedowns that the industry suffered that we would be done. But no, it is going to be another kick in the pants for the fourth quarter,” said Jorge Beristain, an analyst at Deutsche Bank.
For the rest of this article, click here: http://business.financialpost.com/2014/02/08/gold-miner-results-to-get-another-kick-in-the-pants-on-reserve-losses/