Reserve Replacement Is Key for Gold Miners in 2015



Reserve replacement

Gold miners face the problem of mining gold out of the ground at costs less than current gold prices. But they also face the problem of replacing every ounce they take out of the ground. While mines have finite lives, companies operating them don’t. To stay in the business, miners either have to find new mines to replace depleting mines or acquire mines from junior miners (GDXJ) engaged mainly in exploration.

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Change in miners’ reserves

Of the key producers, only Yamana Gold (AUY) and Agnico Eagle Mines (AEM) reported an increase in reserves in 2014 compared to 2013. The above graph shows the reserves for gold miners in 2013 and 2014. Yamana’s gold reserves increased by 20%, while Agnico’s increased by 18% year-over-year due to the acquisition of Osisko Mining’s Canadian Malartic mine in June 2014.

All the other producers reported a decline in reserves. Centerra Gold, Kinross Gold (KGC), and Iamgold (IAG) each reported a year-over-year decline of more than 15%. There could be further write-downs from some of Iamgold’s projects.

Investors should also be aware of the gold price assumption used when comparing reserves across companies. For example, while Newmont and Goldcorp use an assumption of $1,300 per ounce gold price, Barrick’s assumption is much more conservative at $1,100 per ounce.

Agnico Eagle Mines and Yamana Gold form 5.3% and 3.8%, respectively, of the VanEck Vectors Gold Miners ETF’s (GDX) holdings. The SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU), on the other hand, provide exposure to physical gold prices.

Potential to replace reserves

Goldcorp (GG) should be able to replace its reserves successfully with an extensive pipeline project. Its Eleonore and Cerro Negro mines can offer a short-term upside to production growth.

Newmont Mining (NEM) also has some projects in the pipeline. The most significant is the turf vent shaft project at the Merian mine in Suriname. Newmont has planned its non-core asset sales, but it will also have to replenish its production profile in order to continue production at the current base of 4.6–4.9 million ounces.

With declining reserves and a lack of new discoveries, miners can use the mergers and acquisitions option to replace reserves and grow. We’ll talk more about this in our next article.


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