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TABLE OF CONTENTS Feb 24 - Mar 2, 2014 Volume 100 Number 2 - 0 comments

Gold reserves shrink as miners adjust to lower gold prices

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By: Gwen Preston

VANCOUVER — Gold’s sliding price has forced mining majors to cancel new mines, shutter or sell high-cost operations, shelve expansion plans and dramatically write down asset valuations. Now gold’s price decline is cutting into miner’s reserves.

As they discuss results from 2013 and plans for 2014, gold companies are reassessing how many of their resource ounces are economic to mine at today’s lower prices. The answer? A lot fewer.

Barrick Gold (TSX: ABX; NYSE: ABX) just slashed its reserve count by 26%, eliminating almost 16 million oz. gold that the company might have mined at $1,500 per oz. gold, but won’t touch today. Similarly, Goldcorp (TSX: G; NYSE: GG) cut its reserves by 15% while Kinross Gold (TSX: K; NYSE: KGC) erased 14% of its reserve book.

The ounces still exist, but have been bumped down to resource classification. Here’s how that happened.

In its decade-long run-up to almost US$1,900 per oz. in 2011, the price of gold gained more than 550%. As it did, the world’s gold miners boosted the prices they used to count how much mineable gold they had in the ground.

That value, known as the reserve price, is used to ascertain what part of a miner’s gold resources can be mined economically. The ounces that have earned the right to be called reserves.

Miners use a reserve price that is less than the spot price of gold, to give room for volatility and create potential for profit. For example, in 2005 most miners used a reserve price of US$500 per oz., compared to a spot price around US$550 per oz.

By 2011 most gold majors were using US$1,200 per oz. as a reserve price, which was reasonable given the spot price averaged US$1,571 per oz. that year.

In 2012 gold prices went sideways instead of up, but many miners increased their reserve prices regardless. Barrick went the furthest: by 2013 the company had boosted its reserve price as high as US$1,500 per oz., not far below the 2012 average of US$1,669 per oz. and above the 2013 average of US$1,411 per oz.

Gold deemed economic to mine at US$1,500 per oz. is not necessarily so at US$1,411 per oz., let alone at today’s spot price near US$1,300 per oz. The world’s gold majors needed to recalculate their reserves according to the new gold-price reality.

Barrick’s US$1,500 per oz. stance had it positioned as the most optimistic of its gold-mining peers in recent years, but now the major is the most conservative, having shifted to a reserve price of US$1,100 per oz. That shift erased almost 16 million oz. from the major’s gold reserves.

Goldcorp changed to a reserve price of US$1,300 per oz., down from US$1,350 per oz. last year. That change drove a 15% cut to its reserve count. Agnico Eagle Mines (TSX: AEM; NYSE: AEM) dropped its reserve price from US$1,350 to US$1,200 per oz., leading to a 700,000 oz. reduction to its reserves, which now stand at 16.9 million oz. Several other gold majors, including Newmont Mining (TSX: NMC; NYSE: NEM) and AngloGold Ashanti (NYSE: AU), have yet to report, but reserve reductions are expected.

The reserve downgrades fit perfectly with the sector’s new mantra: quality, not quantity. By lowering its reserve price a company drops its highest-cost ounces, leaving behind a reserve book filled with its most cost-effective gold.

Reserves are not alone in being written down — gold majors are also writing down the values of their operations, despite having recorded US$17 billion in such writedowns last year. Barrick reported US$2.8 billion in impairment writedowns for the fourth quarter; Goldcorp recorded $1.2 billion in impairment and tax charges; Kinross recorded a $545-million writedown; and Agnico Eagle, a $436-million charge.

Even though the writedowns keep rolling in, investors seem ready to start rewarding companies for their austerity measures. So far in 2014 the gold mining index is up 16%, against a bullion price that has only gained 5%.

Also, the reserve reductions are being reported as gold gains ground — the yellow metal is trading at its highest level in three months, and has gained 7.8% already this year.

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Agnico Eagle Mines' Pinos Altos gold mine in Chihuahua state, Mexico. Credit: Agnico Eagle Mines
Agnico Eagle Mines' Pinos Altos gold mine in Chihuahua ...
AngloGold Ashanti's Geita gold mine in Tanzania. Credit: AngloGold Ashanti
AngloGold Ashanti's Geita gold mine in Tanzania. Credit...

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