As sure as April showers bring May flowers, January brings reserve updates from gold mining companies that foreshadow the annual earnings reports that these companies will issue in February. Yamana Gold (AUY) and Randgold Resources (GOLD) initiate the February earnings parade from gold mining companies with reports on February 2 and 3, respectively. Kinross Gold (KCG) follows on February 12 with Goldcorp (GG) and Barrick Gold (ABX) reporting on February 13. Newmont Mining (NEM) issues its numbers on February 20.
Gold fell 28% (or more, depending on how you measure it) in 2013 and that damage is certainly reflected in the prices of gold mining stocks. For 2013 shares of Goldcorp were down 39.3%, shares of Barrick Gold were off 48.2%, and shares of Newmont Mining were lower by 47.8%.
But the January updates of reserve levels are still likely to bring more pain as companies write down the level of reserves that they’ve shown on their books for the last year even as the price of gold plunged.
Why more write-downs now?
The level of reserves that a gold mining company records is connected to the price of gold. Some deposits are so rich in gold that they’re worth mining at $1,500 an ounce and at $1,200 an ounce. Other deposits contain such low-grade ores that they were profitable at $1,500 but aren’t profitable at the current $1,200 an ounce or so. Mining companies have been busy cutting costs to the bone during the plunge in gold prices and I expect that the current quarter will show even further cuts. But many gold mining companies bought relatively low-grade assets when gold prices were at $2,000 an ounce and not all of these companies have removed all of these low-grade assets from their reserves even though these assets are no longer economic to mine. As we head into gold reserve reporting season, the prices that gold companies assumed in their reserve calculations are spread over a wide range of $1,400 to $1,500 at Newmont and Barrick, respectively, to $950 an ounce at Yamana.
So we know that some mining companies are going to have to take a whack at their reserve numbers and we can even estimate how big the hit is going to be at specific companies. According to Credit Suisse, at Barrick Gold 10 million ounces of reserves (or 9.7% of reserves) are uneconomic at $1200 an ounce. The percentages for major gold mining companies fall as low as 4% at Yamana, 5% at Kinross Gold, and 6% at Newmont and go as high as 16% at Goldcorp and 19% at Iamgold.
What we don’t know—what we can only guess at—is how much the reduction in reserves at each company is already reflected in the market prices. The carnage in the sector in 2013 was so severe that I’m not sure it says very much. Barrick and Yamana both fell 48% (and change) in 2013—does that mean the market has accurately read reserve cuts into both stock prices? Credit Suisse has taken a stab at estimating how much damage has been already included in stock prices: It calls the impending reserve reductions well telegraphed at Barrick Gold and Newmont Mining and not currently reflected in the share price of Goldcorp. Kinross Gold, Credit Suisse projects, has been relatively “de-risked” while Yamana trades at a premium (which may be justified.)
I’m don’t think I can handicap the market’s reaction to the January reserve reports in the sector. It’s likely that the market will simply decide to whack every stock in the sector—and then separate the good from the bad later. That wouldn’t exactly be unprecedented.
January reserve cuts are, to me, a necessary part of putting in a bottom for gold miners. I just don’t think I want to add positions in the sector ahead of the actual reports. I’d rather see how the market reacts in this situation rather than try to out guess it
Goldcorp and Yamana Gold are both members of my Jubak’s Picks http://jubakpicks.com/the-jubak-picks/ . After the beating these stocks took in 2013 I don’t see a strong argument for selling them now. But I’m not ready yet to start adding to these positions either.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Yamana Gold as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
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