Gold miners were forced to take writedowns of $27 billion last year as gold futures tumbled, according to ETF Securities. “At the end of 2012, the dollar value of gold mining reserves assumed a long-term gold price that ranged from US$1,500oz (for Barrick Gold) to US$950oz (for Yamana Gold). With the gold price currently trading around US$1,250oz, most gold miners will have to devalue assets further and possibly close more mines,” said Gambarini.
Barrick and Yamana combine for over 19% of GDX’s weight with the former being the ETF’s largest holding, according to Market Vectors data.
While lower gold prices weighed on miners last year, the upside is forced cost containment could be starting to bear fruit in the form of rising share prices.
“All-in costs in Q3 2013 were 15% lower than in the previous quarter due to a reduction in capital expenditure and exploration costs. While this might be detrimental for miners’ production in the long run, it will likely have a positive impact on profitability and, in turn, should help support miners’ valuations,” according to Gambarini.
Buoying the case for further upside for gold miners is the last time gold futures resided around $1,250 per ounce, nearly three and a half years ago, “gold miners’ shares were trading 111% above current levels,” according to ETF Securities.
Chart Courtesy: ETF Securities