Gold Miner Writedowns at $17 Billion After Newcrest Fallout

Gold Miner Writedowns at $17 Billion After Newcrest Fallout

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 $1,298.05 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.

Newcrest Plunges

A Bloomberg Index of 14 large gold miners, including Barrick and Newcrest, shows they have lost about $165 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.

Gold declined 23 percent in 2013, sliding into a bear market in April, as the MSCI All-Country World Index of equities climbed 3.4 percent, and the dollar gained 3.5 percent against a basket of six major currencies. Gold rallied for 12 years through 2012 as the U.S. Federal Reserve cut borrowing costs to a record to bolster the economy.

Bullion had its worst week since 2011 in the five days to June 21, tumbling 6.8 percent, after Fed Chairman Ben S. Bernanke said asset purchases may be reduced later this year as the economy strengthens. Holdings in exchange-traded products fell to the lowest level in more than two years as some investors lost faith in the metal as a store of value amid low inflation and a global equity rally.

Regulator Scrutiny

Newcrest has plunged 23 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$3.2 billion this month to A$7.9 billion on June 21, 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.

‘Storm of Writedowns’

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.

Most Exposed

“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.

Next Wave?

“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?”

North American miners traditionally assess valuations at the end of the calendar year, with writedowns announced in the new year.

Kinross said this month it will take a charge of about $720 million in the second quarter on a mining project in Ecuador after failing to agree economic and legal terms with the government. It took a $3.09 billion writedown in February on a mine in Mauritania. CEO Paul Rollinson said in a June 10 phone interview Kinross doesn’t expect to be revisiting any asset values on the gold price this quarter.

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.

Selling Mines

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.

Andy Lloyd, a spokesman for Barrick; Sven Lunsche, a Gold Fields spokesman; and Omar Jabara, a Newmont spokesman, all declined to comment on potential writedowns. A spokesman for African Barrick Gold, who asked not to be named citing company policy, declined to comment. Polymetal didn’t immediately respond to phone calls seeking comment.

Alacer Gold (ASR) Corp., which took a $490 million impairment charge on its Australian unit in March, is selling its two mines in the country as production costs soar. Alacer won’t get the book value of A$370 million for Higginsville and A$210 million for South Kalgoorlie in any sale, Credit Suisse Group AG said in a note this month.

Sea Change

“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, said in a phone interview. “Everyone is going through this process in the gold mining industry at the moment.”

Spot gold has tumbled 33 percent since trading at a record $1,923.70 an ounce in New York in September 2011, closing at $1,292 on June 20. The metal may drop to $1,200 in coming weeks, Sabine Schels, a Bank of America analyst, said June 17.

The sea change in industry sentiment has claimed at least six CEOs of North American producers in the past 18 months, including Barrick’s former boss, Aaron Regent.

Where Newcrest and its peers were previously spurred by investors to seize on the elevated gold price to make acquisitions and develop projects, they are now being scorned for following that advice, according to Ernst & Young’s Elliott.

“What was encouraged as a capital allocation decision in early 2012 is now seen as a bad decision,” Elliott said. “It’s a very unforgiving change in the sentiment of the market.”

To contact the reporters on this story: David Stringer in Melbourne at; Liezel Hill in Toronto at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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