Gold Miner Writedowns at $17 Billion as Newcrest Signals Fallout (Jun 2013)

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Source: Bloomberg – Gold Miner Writedowns at $17 Billion as Newcrest Signals Fallout

Notable excerpts:

Newcrest Mining Ltd (NCM).’s decision to write down the value of its mines by as much as A$6 billion ($5.5 billion) will lead to the biggest one-time charge in gold mining history. It also heralds pain for competitors.

Barrick Gold Corp. (ABX), the world’s biggest producer, Newmont Mining Corp. (NEM) and Gold Fields Ltd (GFI). may be next, according to Jefferies International Ltd. Nouriel Roubini, professor of economics and international business at New York University and known as Dr. Doom for predicting turmoil before the global financial crisis began in 2008, says gold may drop to $1,000 an ounce by 2015, from $1,284.50 now.

Gold companies that spent $195 billion on acquisitions in a decade-long price boom are at risk of taking writedowns like Newcrest’s. Producers face more stresses with brokers from Goldman Sachs Group Inc. to Citigroup Inc. cutting price forecasts as bullion heads for its first annual drop since 2000.

“We would expect that there would be several, if not many companies, who would also in the next reporting period be coming to a list of impairments,” Michael Elliott, sector leader for Ernst & Young LLP’s global mining practice, said in a phone interview from Sydney. “It’s just a question of timing, and who had the largest exposures.”

Newcrest’s writedown, which Australia’s biggest producer said is a result of gold’s slump, is probably the largest aggregate charge announced in the industry, said Elliott, who’s been advising producers for more than 30 years.

A Bloomberg Index (BBRSRGLD) of 14 large gold miners, including Barrick and Newcrest, shows they have lost about $164 billion in market value since gold, now in a bear market, peaked Sept. 6, 2011. Taking into account Newcrest’s expected costs, gold companies will have written down assets by about $17 billion in the past 16 months, data compiled by Bloomberg show.

Newcrest (NCM) has plunged 29 percent since the company said it expects to book writedowns on mines in Papua New Guinea, Ivory Coast and Australia in its full-year results. The disclosure of the expected charge on June 7 is facing scrutiny from regulators over possible selective briefing of analysts.

The Melbourne-based company, which expects to write down its assets by about 25 percent of their book value as of Dec. 31, has seen its market value fall A$3.8 billion this month to A$7.3 billion on June 24, less than the A$9.7 billion it paid to acquire Lihir Gold Ltd. in 2010.

“Anyone who has bought something and paid a premium will be having a good look at themselves,” Paul Hissey, an analyst with Goldman Sachs Australia Pty in Melbourne, said by phone.

Harmony Gold Mining Co., which is partners with Newcrest in a Papua New Guinea venture, said last week that it expects to write down its share of the operation by the end of July.

The fallout from the Newcrest charge demonstrated that investors have not already priced in “inevitable” impairments to gold asset valuations, Jefferies analyst Jake Greenberg said in a June 19 note, also citing a drop in Harmony’s shares. Goldcorp Inc (G)., the world’s biggest producer by market value, and African Barrick Gold Plc are among other major producers facing possible writedowns, he said.

It seems obvious that a storm of writedowns is coming from the gold mining industry,” Greenberg said. “It is not too late to be short these names on this writedown theme.”

Gold Fields uses a price of $1,500 an ounce to calculate reserves, Newmont uses $1,400 and Barrick $1,500 for all but one mine, according to the latest annual reports filed by the companies. Goldcorp uses $1,350 for most operations, $1,500 for both its joint venture in Nevada and a mine in the Dominican Republic and $1,400 for a mine in Argentina, its annual report shows. Newcrest uses a price of $1,250 for reserves at most assets and $1,400 for an Indonesia mine and a project in Papua New Guinea, according to a February statement.

“While extreme, unforeseen stresses to our business are always possible, we do not believe material writedowns are likely given the strength of our asset base,” Goldcorp spokesman Jeff Wilhoit said in an e-mailed statement.

African Barrick and Russia’s Polymetal International Plc are the most exposed to reserve writedowns, Liberum Capital Ltd. said in April. If spot prices persist for six months to 12 months, producers may start stockpiling low-grade material and begin to make writedowns and cut dividends, it said.

The gold-mining strategy of bulking up was led by Barrick, which became the industry leader in 2006 when it bought Placer Dome Inc. for $10.2 billion. Now Barrick is shedding assets and cutting costs to placate concerned investors.

“We’ve already seen one wave of those writedowns come for the North Americans,” Paolo Lostritto, a Toronto-based analyst at National Bank of Canada, said by phone June 11. “The question then becomes if the gold price attrition continues this year, is there another wave?

Barrick, which took a $3 billion writedown in February on a copper mine it bought in 2011, is likely to take a charge on three gold mines in Australia, Melbourne-based analyst Vince Pisani at Shaw Stockbroking Ltd. said. The company is working with Bank of America Corp. and UBS AG on a possible sale of the mines, two people with knowledge of the matter said April 20.

The mines may fetch as much as A$1 billion, the West Australian reported April 19, citing unidentified people. Barrick acquired the sites in its $2.3 billion acquisition of Homestake Mining Co. in 2001 and its takeover of Placer Dome.

“They are probably already going to be preparing a writedown of those assets in their books, they will probably be out in the next two months,” Pisani said in a phone interview.

“Everyone is looking at how they optimize their portfolio in terms of maximizing value,” David Quinlivan, chief executive officer of Englewood Colorado-based Alacer Gold (ASR), said in a phone interview. “Everyone is going through this process in the gold mining industry at the moment.”

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2 thoughts on “Gold Miner Writedowns at $17 Billion as Newcrest Signals Fallout (Jun 2013)

  1. Nice blog. I especially like the comment: “Anyone who has bought something and paid a premium will be having a good look at themselves,” It seems as if African operations at most firms rarely meet expectations and lead to writedowns i.e. Kinross.and now potentially African Barrick. In the long run though, I wonder if the miners don’t mind the opportunity to ‘right-size’ their books and use the decline in gold and silver prices as cover to slash headcount and expenses as Barrick announced recently.

  2. Pingback: How Gold Miners Became A Terrible Investment (Jul 2013) | livinginabubbleblog

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