Majors' gold reserves shrink under pressure from lower gold prices

As predicted in February, a 15% year-on-year drop in the gold price in 2013 forced mining companies to lower the prices they use to calculate their gold reserves.

As the gold price climbed steadily from 2002 to 2012, gold producers increased their reserves calculation prices to allow profitable mining of lower-grade, higher-cost ores.

Examining the nine-year reserves history of five major producers— Barrick Gold Corp., Newmont Mining Corp., Goldcorp Inc., AngloGold Ashanti Ltd., and Kinross Gold Corp. — shows a 14% weighted-average decline in their reserves prices from 2012, an 11% average decline in their total reserves (net of changes due to acquisitions, divestitures, and production), and an 8% increase in their weighted-average reserves gold grade.

Barrick ended 2012 with 140.2 million ounces of gold in reserves at a reserves price of US$1,500/oz, the highest price among the five companies for the year.

It ended 2013 with 104.1 million ounces in reserves, using a reserves price 27% lower at US$1,100/oz; after adjustment for depletion and M&A activity, its reserves fell 18% in 2013.

The next-highest 2012 reserves price was US$1,400/oz used by Newmont; at US$1,300/oz in 2013, its adjusted reserves declined 5% from 2012.

Goldcorp's adjusted reserves declined 15% in 2013 at US$1,300/oz compared with US$1,350/oz in 2012.

AngloGold Ashanti's adjusted reserves declined only 2% in 2013 at US$1,100 compared with US$1,300/oz in 2012.

Kinross, having faced shareholder scrutiny since 2011 over its purchase of Red Back Mining, kept its reserves price at US$1,200/oz for the third consecutive year, but still reported a 12% drop in adjusted reserves in 2013 — with the adjustment including the 2013 write-down of 6.7 million ounces at its Fruta del Norte project in Ecuador after it failed to reach an agreement with the government on mine development.

The remaining decline in Kinross's reserves was largely due to an increased focus on mining higher-grade ore to reduce costs.

So far in 2014, gold prices have been volatile — spiking to $1,385/oz in March at the beginning of the Ukraine crisis after a three-year low of less than $1,200/oz at the end of 2013, and currently hovering around $1,300/oz.

Although analysts' 2014 gold price forecasts ranged between US$1,100/oz and US$1,400/oz, Newmont and Goldcorp used $1,300/oz at the end of 2013 — the most optimistic reserves price among the five majors.

We believe that the majors will likely continue to focus on cost-cutting in 2014 in order to preserve their profit margins, since significant further reserve cuts are unlikely in the near term as companies have already adjusted their strategies to accommodate market uncertainty and investor concerns.