The Deal: Goldbugs Return Despite Miners' Troubles

NEW YORK ( The Deal) -- Gold prices may have fallen about 26% since January, but for the companies that mine the precious metal it has rarely been more costly.

Australia's largest gold producer, Newcrest Mining, on Monday, Aug. 12, booked A$6.23 billion ($5.71 billion) in impairments and asset write-downs. The news follows a week after larger rival Barrick Gold ( ABX) of Toronto slashed $8.7 billion off the value of its assets.

The huge losses underline the wider woes that are hurting everyone from the largest gold producers, many of which own mines that are now loss making, to gold prospecting companies, which are bleeding cash waiting for absent buyers.

The extent and speed of the fall in the value of gold mining assets was highlighted by Newcrest's Monday announcement, which included a A$3.4 billion charge linked to its Lihir Gold operation in Papua New Guinea. The operation was bought in 2010 for A$9.2 billion.

The losses are grim news for the gold mining sector and for those hoping for a return to dealmaking that is central to the progression of gold projects from exploration to production. Those deals tend to trickle down from the top. Newcrest and Barrick, which along with Goldcorp ( GG) and Newmont Mining Corp. ( NEM) make up the big four of gold mining, are in no mood to buy.

Barrick said last week it will close or reduce production at 12 of its 27 mines to focus on profitable operations. Newcrest said it will cut costs by "removing higher cost ounces from the production profile and accelerating reductions in operating costs, corporate costs and capital expenditure."

The pressure heaped on balance sheets by the write-downs was illustrated by Newcrest's gearing, which stood at 29% following its write-downs and a resultant record loss of A$5.8 billion announced on Monday. The company said it was comfortable with its debt but reiterated that its long-term target remains a gearing level of 15%. High gearing is when a company has a high level of borrowing compared to its share price. Moody's Investors Service last month downgraded the mining company to Baa3, one step above junk status, and warned that it could be cut further.

Newcrest will pay no final dividend this year as it seeks to preserve cash. Citigroup analysts said they don't expect it to begin to pay dividends until "at least" the 2016 financial year.

Both Barrick and Newcrest would happily sell their more expensive mines, but will likely have to close them or idle them in the hope of a gold price rebound.

Barrick has already experienced the difficulties of finding buyers in the current market. It has been looking for a buyer for its 72.9% owned African Barrick Gold plc unit since at least mid-2012. The unit, which could be worth about £820 million ($1.3 billion), had attracted interest from China National Gold Group, which entered then abandoned talks in 2012. African Barrick had a similarly fruitless experience in its search for a buyer for its Tulawaka mine in Tanzania, which it eventually handed back to the Tanzanian state.

With buyers largely absent, attention across the whole industry has turned to preserving cash in the hope of waiting out the hiatus. It is a wait that promises to become terminal for some operations and companies.

"The cost-cutting initiatives implemented by companies of all sizes have been broad and severe," Paradigm Capital Group's Toronto-based analysts including Don MacLean noted on August 12. "Exploration is imploding ... mine closure announcements have begun." For those determined to see the silver lining (or gold in this case) to the clouds, there are some glimmers of hope.

Hedge funds and other speculators have been buying gold futures in huge numbers in recent weeks, increasing the number of long bets by about 74% to $6.6 billion, up from $3.8 billion. At the same time, China's gold consumption increased in the first half of the year by 54% year-on-year to 703.4 metric tons, within sight of the 832 metric tons it purchased over the whole of 2012, according to the China Gold Association.

There is also evidence that the market has already accounted for the worst possible scenarios. Newcrest shares closed Monday at A$12.39, up A$0.91 or almost 8%, despite its record loss. Barrick shares were largely unmoved by its write-downs, which were announced on Aug. 1, and closed Aug. 9 at a one-month high of C$18.85 ($18.30).

Written by Paul Whitfield.