Holding Its Own

Despite current market conditions and commodity prices, 2008 was a strong year for gold. The price started the year at US$846 and averaged over US$800. Yet, despite gold’s strength, how are gold mining companies responding in the economic downturn?

While other commodities have trended down over the past year, according to the PricewaterhouseCoopers 2008 Global Gold Price Survey of 45 leading gold mining companies from North America, Australia and South Africa, gold has held its value. Investors are looking for a safe asset amid the instability of the financial markets, and gold is acting as a life preserver in the weakened economy. Yet while mining companies have been posting surging revenue, only one third of companies indicated that their long-term production levels would increase.

Gold price assumptions, carrying values and reserves

According to the survey, 62% of companies determined the gold price assumptions that will be applied to ongoing reserve determinations and carrying values at December 31, 2008. The average price indicated for determining reserves was US$734 and for testing carrying values was US$751. While gold price assumptions have been increasing steadily in the past few years, the most significant increases were in 2008. This may be a factor of both spot price increases and cost escalation, as production costs have also trended significantly upward over the past few years.

Looking ahead, 69% of companies plan to use the same prices over time. Of those planning to use variable prices, the average prices reported are trending downwards in the long term. The current price, analysts’ trends and historic price trends continue to be the main factors considered in estimating gold prices.

Unfortunately, only 62% of companies planned to disclose price assumptions in determining reserves and only 31% for carrying values in 2008.

Financing

According to the survey, many companies have or are in the process of updating feasibility studies incorporating higher commodity prices, as well as input cost escalation; and 64% have updated their mine plans significantly to reflect escalating input costs. Respondents indicated that raising capital was increasingly challenging for companies in 2008. This trend changed significantly for producers in January 2009, as a number of large equity financings were announced, however credit markets still remain tight.

Hedging

While the use of gold sales derivatives did not change significantly in 2008, some companies are starting to use hedging instruments to control the costs of key production inputs. Approximately 20% of companies hedge gold sales and nearly all follow “normal sales” accounting. An increasing number of companies are hedging production costs, but only a fraction applied hedge accounting to gold sales or production cost hedges in 2008.

Reserve sensitivity

Among the respondents, 69% of companies choose not to disclose the sensitivity of reserves to price assumptions in 2008. In order to increase the transparency and relevance of their reporting, this is an important area of focus for those companies wishing to do so.

Exchange rates

When it comes to exchange rates, 42% of companies indicated that they would disclose exchange rates in 2008. While the current exchange rate remained the leading factor considered when estimating future exchange rates, analysts’ predictions and historical trends were also important considerations.

While it is difficult to predict the road ahead, the upward trend over the past years in prices used for the determination of reserves and the recoverability of carrying values is indicative of the outlook in the industry surrounding future gold prices. Gold mining companies are encouraged to be more transparent with respect to the assumptions they use in determining their reserves and in considering the recoverable values of the carrying values they have recorded in their year-end balance sheets. They should also provide more information about the effects that changes in these assumptions would have on reserves and carrying values. This information is valuable to investors since it would allow for a more informed comparative analysis of companies in the gold mining sector and for analysts to more closely monitor changes in entity valuations arising from changes in future price forecasts.

For more information visit www.pwc.com/ca/mining