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The gold mining sector is braced for asset writedowns and a fall in the amount of reserves in the ground after the precipitous drop in the price of the metal this year. 

Some of the world’s largest gold miners face having to tell investors that their growth has gone into reverse because the falling price has made it uneconomic to mine some of the areas previously classed as reserves. 

Miners’ reserves are vital to their prospects and valuations, since companies would quickly shrink if they did not replace what they dug from the ground each year. Rising price expectations have until now helped gold miners be more optimistic about their reserves and to include ounces that they would previously not have been able to mine profitably. 

“Gold has been going up for 12 of the last 13 years and reserves have gone up with the price. This [2014] is definitely the year we will see reserves falling across much of the sector,” said Jorge Beristain, an analyst with Deutsche Bank. “Reserve calculations have been based on a series of suppositions that in the present environment are no longer tenable.” 

Gold miners including Barrick Gold and Newmont Mining, the world’s largest by ounces of annual production, have had a difficult year in 2013 because of the effect of the gold price on some of their most important projects. 

Miners usually update their reserve statements early each year, and do not all assume the same price. Barrick’s last reserve statement assumed a gold price of $1,500 per ounce for most of its 140m oz of reserves, while Newmont based its statements on a $1,400/oz price. 

Gold started the year at about $1,600/oz but fell sharply in April and has been hovering at about $1,200/oz in recent days. 

Newmont, whose 99m oz of reserves are the industry’s second-largest, said early this year that a $100 fall in the gold price would cut reserves by 7.6 per cent. Barrick has previously said a $300/oz change in the assumed gold price would see its reserves fall less than 10 per cent, with a lower impact at its larger, more important mines. 

“I would guess some miners might have to use $1,100 as the price for their reserves,” says a senior executive at one UK-listed company. “Or they might take the view that the gold market is in a very strange place in terms of volatile behaviour at the moment, which they might use to justify using a higher price.” 

Some miners use lower gold prices in reserve calculations. Kinross Gold, a large Canadian miner, based its latest reserves on a $1,200 price. 

Barrick and a number of other gold miners including Newcrest Mining, Australia’s largest, have already made billions of dollars of writedowns during 2013 as the gold price fell. 

However, some miners face having to acknowledge further impairments connected to goodwill held on their balance sheets or the carrying value of projects. 

“The writedowns of the past quarters in 2013 have tended to be connected with the costs of projects. What we are talking about now is cuts to the value of companies’ land holdings and the gold that they hope is in the ground,” Mr Beristain said. 

Silver miners also face writedowns and reserve cuts because their price assumptions are well above current spot prices, he added. 

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Hedge Funds 'Could Cause Disaster' for Gold TANA GOLDFIELDS Mining Fraud Investment Tips
Peter Hambro, one of the leading figures in Britain’s gold mining sector, has criticised hedge funds for distorting the market for gold and warned that there is potential for “disaster” in the industry.
Mr Hambro, co-founder and chairman of Russian gold miner Petropavlovsk, made the comment in an interview in The Sunday Telegraph. 

The gold price, fixed at $1,376.12 per troy ounce in London on Friday, has fallen more than 30pc from a 2011 peak of more than $1,900. 

Figures from the World Gold Council last week showed that ownership of the world’s gold shifted further East during the first half of 2013. 

Overall demand for gold was 12pc lower in the three months to the end of June than in the comparable period for 2012, as Westerners dumped their exchange-traded holdings and Asian consumers responded to lower prices by adding to their hoards of jewellery and bullion. 

“It’s rather odd,” said Mr Hambro, “Gold is streaming into the Far East. Russians are still buying; the Chinese are buying. There’s no secret. It’s in the international statistics.
“Where the selling came from that knocked the gold price down, I really don’t know. It was such a very strange thing. 

“I’ve been in the gold business for 35 years and never known a big change like that where it wasn’t obvious where it came from.” 

Asked whether he is concerned that hedge funds are distorting the market, he said: “The quantity of gold available for delivery on the Commodities Exchange in New York is at its lowest level ever. 

“The size of the contracts is at its highest, but the deliverable is at its lowest. There is the potential for disaster in those numbers.” 

“Fractional reserve banking in gold is responsible for a lot of the strange things going on. You can set yourself up as a hedge fund and nobody knows who you are. 

“Because of these strange machinations and the distortion between the physical market and the paper market, it’s very hard to say what’s going to happen. 

“There’s a real risk that the people who’ve sold 'paper gold’ won’t be able to deliver and there will be some official ruling that will settle all the bargains at today’s price. Something like that will happen.”

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