Huge asset writedowns and CEO ousters are all the rage among global mining giants. On Tuesday, Anglo American PLC wrote down the value of a Brazilian iron ore project by $4-billion (U.S.), following writedowns this month by Rio Tinto PLC and Cliffs Natural Resources . BHP Billiton took a big writedown last summer to the value of its shale gas properties, and has hinted another could be coming to its aluminum division (All but Cliffs are looking for a new CEO). Now, watch for writedown fever to spread to Canada.
Mining companies here have also overpaid for assets, sustained a runup in operating costs and seen an exodus of CEOs, but writedowns haven't been as widespread. Kinross Gold Corp. and Newmont Mining Corp. did take writedowns of $2.49-billion and $1.6-billion, respectively, last year. The ones to watch now are Barrick Gold Corp., Goldcorp Inc. and Kinross yet again.
Barrick appears likely to take a hit on the value of its Lumwana copper mine in Zambia, which it picked up in its $7.3-billion takeover of Equinox Minerals two years ago. On Tuesday, recently installed chief executive officer Jamie Sokalsky told an investor conference "the short-term performance has been unacceptable" and that costs "are higher than initially anticipated."
Stifel, Nicolaus analyst George Topping said the company has faced technical problems developing a second ore body in the mine and been hit with higher labour and royalty costs. He and Veritas Investment Research analyst Pawl Rajszel suggested the Equinox assets could be written down by more than $1-billion.
Barrick faces challenges elsewhere. Both Barrick and Goldcorp have major mining projects in Argentina that will require billions of dollars of capital spending – Pascua-Lama and Cerro Negro, respectively. Argentina has a long and unfortunate history of gross economic mismanagement; the current regime, headed by President Cristina Fernandez de Kirchner, is no exception. The government has prevented the currency from devaluing, allowing inflation to reach 25 per cent. Miners have also hit bureaucratic snags trying to import equipment. If the situation doesn't improve, both could face significantly higher costs and writedowns in 2014, said Mr. Topping.
As for Kinross, it has already written down its Tasiast mine project in Mauritania by $2.49-billion, after picking up the asset in its $7.1-billion purchase of Red Back Mining in 2010. Recently installed CEO J. Paul Rollinson will file a new plan for Tasiast this year, which could herald further writedowns.
Of greater concern is its Fruta del Norte project in Ecuador. Kinross is trying to negotiate better royalty and tax terms with the government but is months past an expected resolution. If it can't get acceptable terms Kinross may walk away, resulting in a writedown of the full $650-million project value.
Goodwill writedowns are embarrassing: they reflect poorer-than-expected returns and sins of past, exorbitantly-priced acquisitions. The good news is that they rarely surprise the market – they are usually priced into the stock by then – and don't represent cash costs. They are really just readjustments to a set of assumptions including metal prices, discount rates and production plans. They reduce depreciation, increase future earnings and leave companies with a cleaner slate.
"Book value is not taken as seriously in mining because it's not useful," said Mr. Topping. After all, this isn't like permanently impairing the value, of say, a factory that makes cassette tapes or buggy whips. The gold in the ground is still gold in the ground.
Sean Silcoff