B.C. gold miners | BCBusiness
After a one-time adjustment in 2013, the province's major gold producers are well positioned to get back to profitability
Scan the “income” column, and you’d think 2013 was a disastrous year for B.C.’s gold miners. The bottom line is deceiving, however; one-time writedowns at the end of the year masked otherwise solid operating performances, and pave the way for profitability and continued growth.
Goldcorp Inc. recorded a loss of $2.7 billion for the year, while Eldorado Gold Corp. and New Gold Inc. reported losses of $653 million and $191 million, respectively (all figures in U.S. dollars). All three, however, reported near-record output and operating costs that are among the industry’s lowest—typically in the range of $900 an ounce (well below current market prices hovering around $1,300 an ounce).
The gap between productivity and profitability can be attributed largely to accounting adjustments due to falling gold prices. At the start of the year, gold had been trading in the $1,700-an-ounce range for about three years. By year-end it dropped to $1,200 an ounce. The falling price didn’t translate directly to losses for the three companies, but forced them to reassess the value of the gold reserves they were carrying on their balance sheets and to adjust their future development plans.
“In a lower gold-price environment, people may adjust their long-term view on gold prices down,” explains Mark Platt, a partner with PwC in Vancouver who runs the firm’s B.C. mining practice. “That means they’re going to get less proceeds from their sales and it also means they’re going to look at their geological models and they may include less reserves and resources as mineable.”
In the case of Goldcorp, after reassessing the value of reserves at all of its mines the result was a one-time writedown of $2.4 billion, due primarily to a reduction in the estimated value of reserves at its Peñasquito mine in Mexico and its Pueblo Viejo mine in the Dominican Republic.
Eldorado attributed its writedown of $808.4 million primarily to a reassessment of its Jinfeng mine and Eastern Dragon development project in China. New Gold reassessed the expected output of its Cerro San Pedro mine in Mexico and its Mesquite mine in the U.S.
According to Ash Guglani, a research analyst with Salman Partners in Vancouver, Goldcorp, Eldorado and New Gold are cushioned from one-time price shocks by a diversified global portfolio of mines and development projects, and are experienced at adapting to changing market conditions: “It really comes down to adapting to the new lower-price environment,” he notes.
It was an overdue one-time adjustment following the go-go years of 2011-13, when gold prices were so high that miners anticipated feeding the pipeline at similar valuations for the indefinite future. “I think what happened is a lot of the miners were spoiled up to last year because you can be aggressive when you factor in $1,500 gold, which means you’re scooping a lot more gold,” explains Guglani.
Goldcorp, Eldorado and New Gold have all revised their production plans and asset valuations based on long-range projections of gold in the $1,300-an-ounce range, well in line with the industry consensus. Among global mining companies surveyed by PwC last November, the average assumption for 2014 prices was $1,309 an ounce, with a longer-term average of $1,369.
All three companies have productive, low-cost mines and a healthy portfolio of development projects. All are predicting increased production in 2014 at costs below $1,000 an ounce. “Everybody has made adjustments to their mine plans and these companies have shown that they can meet their targets and adapt to the lower gold-price environment,” says Guglani.