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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Write-Downs: Death Sentence or Opportunity?

Stocks in this article: AUY AEMZF

By Jeff Clark, senior precious metals analyst

NEW YORK ( TheStreet) -- For many primary gold producers, the second quarter of 2013 was a breathtakingly bad quarter. It wasn't so much the massive drop in earnings many reported -- those had been, for the most part, expected -- but the so-called "impairment charges" announced.

(Impairment is the opposite of appreciation, that is, the reduction in quality, strength, amount, or value of an asset. "Impairment charges" means that a company reduces or "writes down" the value of the assets on its books.)

The gold price averaged $1,630.45 in the first quarter this year, falling to $1,413.64 in the second. The downturn squeezed profit margins, obviously, but it did the greatest damage to the value of many company assets that are based on gold.

But what will happen to those same assets if the gold price is on the rise again? What does it mean for us as investors? I'll answer these and more questions below.

First, here's a look at the amount of write-downs the six largest primary gold producers announced last quarter.

The explanation the companies gave for these impairment charges was essentially the same in every case: short- and long-term gold price assumptions that hadn't panned out. Total losses for just these six producers were $23.1  billion. That's a lot of dough to send to money heaven, for a relatively small industry. Food for thought.

Here's what you need to know as an investor in this sector.

How does an impairment charge occur?

In public companies, management must report a reasonable value of company assets to shareholders and the public. If labor or other production costs rise, they may have to reassess the value of the company's assets.

In this case, the price of gold--the product many of our companies sell -- dropped 13.3% in just three months, and did not seem likely to rebound immediately. Of course, that changed the amount of earnings investors could expect from a gold mine. Companies had to revise the net present value of projects in development, or the book value of mines in production, with the new reality for gold in mind.

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