During fiscal 2013, the world's four largest gold miners, Barrick Gold (ABX +0.86%), Goldcorp (GG +0.00%), Newmont (NEM +0.69%), and AngloGold (AU +0.00%), all reported seemingly catastrophic losses, which when combined totaled just under $18 billion.
However, despite these losses all four companies have continued to pay a dividend to investors, and year to date all four have seen their stock prices rise by as much as 30%. So what's going on?
Game-changing losses
Barrick, Goldcorp, Newmont, and AngloGold all started 2014 by reporting horrendous losses. For the most part, however, these losses were related to impairment charges and on an underlying basis, all four of the miners remained profitable.
|
Company |
FY Gross Profit |
Impairments |
FY Loss After Impairments |
|---|---|---|---|
|
Barrick Gold |
$5.3 |
$13.1 |
($10.4) |
|
Goldcorp (USA) |
$1.1 |
$2.6 |
($2.7) |
|
Newmont Mining Corp |
$3.1 |
$4.6 |
($2.5) |
|
AngloGold Ashanti Limited (ADR) |
$1.5 |
$3.2 |
($2.2) |
Figures in $US billions.
Indeed, most of these impairments relate to revaluations of gold reserves as the miners rebase the gold price levels at which these reserves have been calculated. These impairments also include operational restructuring costs, changes in forward mine plans and deferments in capital projects.
So, while on paper these losses appear to be irrecoverable, in practice the losses are just paper losses and are unlikely to reflect directly on to the business.
For example, if we take a look at the cash flow figures for the above companies the picture is completely different.
|
Company |
Cash Generated From Operations |
|---|---|
|
Barrick Gold |
$4.3 |
|
Goldcorp (USA) |
$1.0 |
|
Newmont Mining Corp |
$1.5 |
|
AngloGold Ashanti Limited (ADR) |
$1.2 |
Figures in $US billions.
Using cash flows to analyze business performance is a much better way of assessing the health of the business over the traditional profit and loss account. Cash flows reflect the cash coming both in and out of the business, excluding non-cash impairments such as mine revaluations. Cash flows are essential to solvency -- if a business or person does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue.
The future looks bright
However, now these miners have taken such heavy losses that they have a margin of safety within which they can operate. In particular, as these impairments have already been taken, if the gold price falls further miners won't get caught out and have to take such hefty revaluation charges again.
The gold deposits are still there but are just a little less likely to be brought into future production plans without some very big gold price increases -- for the time being at least. This is an extremely cautious approach, exactly what's needed in the current environment of volatile gold prices.
Further, by deferring capital and exploration spending on these projects that have seen their values written down, in the short term miners should see their bottom lines improve. That being said, on a long-term basis it is likely that production could fall short of expectations as development projects remain idled, not producing enough gold to cover falling production from mature assets.
Overall then, in the short term, Barrick, Newmont, Anglo and Goldcorp could be in for a sustained period of earnings growth as they continue to cut costs and reconsider expensive projects while maintaining low-cost output.
Foolish summary
While the headline losses across the mining industry may have seemed frightening when they were announced at the end of 2013, the new cautious approach gold miners are taking is keeping financials in a healthier state than they have been for some time.
