A 15% year-on-year drop in the average annual gold price in 2013 is forcing gold producers to revise the prices they use to identify ores that are profitable to mine, with Barrick Gold reportedly using a $1,100/oz gold price to calculate year-end 2013 reserves. SNL Metals & Mining expects most of the other gold producers to follow suit when they begin releasing their year-end 2013 reserves statements this month. To examine the relationship between changing gold prices and how companies value their reserves, SNL looked at five of 2012’s top gold producers — Barrick Gold, Newmont Mining, Goldcorp, AngloGold Ashanti and Kinross Gold. For the end of each year between 2005 and 2012, SNL took simple averages of the five companies’ reserves calculation prices, their cash operating costs and their gold reserves grades, and compared them with the annual average gold price for each.
During a period of steeply rising gold prices from 2005 to 2012, the major gold miners increased their reserves calculation prices, somewhat below but largely in tandem with gold prices. Cash costs to mine gold followed the upward trend but stayed well below both the reserves calculation price and the actual price, leaving generally healthy annual profit margins for the gold-mining industry for most of the past eight years. Higher reserves prices also allowed the profitable mining of lower ore grades — including at mines considered marginally economic or uneconomic at lower market gold prices.
Everything changed at the end of 2012; gold prices, which hit $1,747/oz in November 2012, sank alarmingly through 2013 past the minimum prices most companies used to calculate their economically minable reserves at the end of 2012. The price fell to just above $1,200/oz by late December 2013 — almost $300/oz less than the $1,500/oz Barrick Gold used to calculate its year-end 2012 reserves (2013’s average gold price was $1,411/oz). With 2014 gold market price forecasts ranging between $1,100/oz and $1,400/oz, and little change in sight for 2015, gold producers will likely lower their forward-looking reserves calculation prices quite sharply in their year-end 2013 reserves statements. This could lead to reduced production at some mines and the shuttering of others over the next few years until gold prices improve, and even further divestitures of marginal mines.
