Write-downs Fast Becoming the Name of the Game in Goldland

Kinross is back on the write-down train. Who’s next to climb aboard?

| More on:
The Motley Fool

Kinross (TSX:K,NYSE:KGC) has announced that it’s walking away from Fruta del Norte, the company’s $1.2 billion project located in Ecuador.  The asset’s carrying value will be written down by $720 million after a dis-agreement with the country’s government over a proposed 70% windfall tax could not be overcome.

This is just the latest in a series of charges that have occurred, and are expected to continue to occur, in the gold sector.  Prior to this, the most recent took place just last week when Australia’s biggest miner, Newcrest, announced a $6 billion hit as the lower gold price has reduced the value of the company’s reserves.

This issue with writing-down reserve values is expected to touch many in the sector, but particularly those who are using an elevated long-term price to “value” these assets.  Of the majors, this list includes Barrick Gold (TSX:ABX,NYSE:ABX) and Goldcorp (TSX:G,NYSE:GG).  Both companies are currently carrying their long-term reserves at $1,500/oz and $1,350/oz respectively.  With the price of gold currently trading at a spot price of $1,370/oz, these long-term assumptions appear rather aggressive.

To be clear, the Kinross write-down of Fruta del Norte is not reserve based.  They appear to be packing up camp and leaving the asset behind, due to a rift with the government.  Perhaps this will turn out to be a bargaining tactic, but, in the grand scheme of things, Kinross taking a stand on this issue could be viewed as a good thing.  The industry has gotten into the mess that it’s in after years of spare-no-expense growth.  To see Kinross making a seemingly math-based, economical decision is a refreshing breath of fresh air.

Foolish Takeaway

Mining is notoriously cyclical and carries a striking (although more protracted) resemblance to the life-cycle of a binge drinker.  After years of over-indulgence, we’re currently in the hangover stage of the cycle in the gold mining industry.  Kinross’s call to walk away from Fruta del Norte however is a sign that the recovery stage is approaching.

While gold miners have been beaten up and appear to be trading at attractive levels, their performance remains heavily influenced by the price of gold.  We have created a special FREE report that profiles 3 dominant businesses who dictate their own rules.  Simply click here and we’ll send you “3 US Stocks Every Canadian Should Own“ – FREE! 

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler is short $32 July 2013 put options on Goldcorp and owns shares of Barrick Gold.  The Motley Fool holds no positions in any of the stocks mentioned at this time. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

A worker uses a double monitor computer screen in an office.
Dividend Stocks

2 of the Best Canadian Stocks That Pay Out Monthly

These two Canadian dividend stocks are some of the best to buy, offering yields upwards of 5.4% and returning cash…

Read more »

Oil pumps against sunset
Energy Stocks

Suncor Stock: How Low Could it Go in 2023?

Suncor (TSX:SU) is up on the back of a bounce in oil prices but remains out of favour. Can new…

Read more »

clock time
Dividend Stocks

How Investors Can Build a $1 Million Portfolio in 12 Years

If you can handle it, you can certainly create a million-dollar portfolio in just 12 years, especially considering this dividend…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Passive-Income Seekers: 4 Safe Dividend Stocks to Own Beyond 2033

Dividend stocks are great, but only if they continue to perform after downturns as well. In the case of these…

Read more »

stock analysis
Tech Stocks

Investing in AI: 1 Cheap Tech Stock Poised for Growth

Docebo is a little-known Canadian tech firm that's unlocking the power of next-generation AI technologies.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

4 Big Dividend-Paying Stocks for 2023

These four stocks all earn strong cash flow and offer attractive dividend yields, making them some of the best to…

Read more »

A airplane sits on a runway.
Investing

1 Growth Stock Down 40% to Buy Right Now

This Canadian stock has years of growth potential, and considering the significant discount it trades at now, it's a top…

Read more »

grow dividends
Dividend Stocks

This 7.5 Percent Dividend Stock Pays Cash Every Month

If you need cash now, this dividend stock is certainly one I would consider that could double in share price…

Read more »