When three of the industry’s largest gold producers announce reserves reductions, production cuts and billions in net losses at the end of a fiscal quarter, it’s bound to set off alarm bells—particularly for investors and observers who don’t follow the mining sector on a daily basis.
Early in February, Barrick announced it would reduce gold output by about 16% in 2014 and reported a net loss of $2.8 billion in Q4 2013, contributing to an annual loss of $10.3 billion. Kinross announced a cumulative 2013 loss of $3 billion and Goldcorp, a 2013 loss of $2.7 billion, including $1.1 billion in the fourth quarter.
The three producers also reduced their reserves estimates by between 15% and 33%, in line with a significant drop in the gold price during 2013. As SNL Metals & Mining explained in a recent report, a 15% year-on-year drop in the average annual gold price in 2013 is forcing gold producers to revise the prices they use to identify ores that are profitable to mine, with Barrick reportedly using a US$1,100/oz gold price to calculate year-end 2013 reserves. SNL Metals & Mining expected most gold producers to follow suit when releasing their year-end 2013 reserves statements.
To examine the relationship between changing gold prices and how companies value their gold reserves, SNL looked at five of 2012’s top gold producers—Barrick, Newmont Mining, Goldcorp, AngloGold Ashanti and Kinross. For the end of each year between 2005 and 2012, SNL took simple averages of the five companies’ reserves calculation prices, their cash operating costs and their gold reserves grades, and compared them with the annual average gold price for each.
During a period of steeply rising gold prices from 2005 to 2012, the major gold miners increased their reserves calculation prices, somewhat below but largely in tandem with gold prices. Cash costs to mine gold followed the upward trend but stayed well below both the reserves calculation price and the actual price, leaving generally healthy annual profit margins for the gold-mining industry for most of the past eight years. Higher reserves prices also allowed the profitable mining of lower ore grades—including at mines considered marginally economic or uneconomic at lower market gold prices.
Everything changed at the end of 2012; gold prices, which hit $1,747/oz in November 2012, sank alarmingly through 2013 past the minimum prices most companies used to calculate their economically minable reserves at the end of 2012. The price fell to just above $1,200/oz by late December 2013—almost $300/oz less than the $1,500/oz Barrick Gold used to calculate its year-end 2012 reserves (2013’s average gold price was $1,411/oz). With 2014 gold market price forecasts ranging between $1,100/oz and $1,400/oz, and little change in sight for 2015, gold producers will likely lower their forward-looking reserves calculation prices quite sharply in their year-end 2013 reserves statements.
SNL’s report correctly predicted that this could lead to reduced production at some mines and the shuttering of others over the next few years until gold prices improve, and even further divestitures of marginal mines. Barrick, for example, said it would cut reserves by 26%, 2014 capital investment by about half, and would continue to investigate options for selling or closing some of its higher-cost operations.
Software Solutions
Announcement of the multiple reserves reductions also sharpened focus on the importance of timely, accurate reserve estimation and resource management for a company’s economic health. There is a wide selection of software tools and systems available on the market for this purpose, and developers continue to improve overall product functionality and effectiveness.
Shortly after the gold-producer announcements in early February, for example, France-based software developer Geovariances announced the launch of the Vario Pack for Isatis, its comprehensive software geostatistics solution. The company said Isatis Vario Pack is intended for resource-estimation professionals who wish to go deeper into data or domain analysis and to gain efficiency in variogram modeling.
Two premium features of Isatis are available in Isatis Vario Pack:
- An exploratory data analysis tool allowing data cleanup and spatial analysis through interactive and linked-together base maps, histograms, experimental variograms and other statistical representations; and
- A variogram autofitting tool capable of handling complex variography, allowing quick and high-quality fitting of multi-variate, multidirectional and multistructure variograms.
Isatis Vario Pack also provides tools for the detailed analysis of the transition between geological domains. These tools, described by Geovariances as unique in the marketplace, help characterize the relationships between domains and grades, and analyze the grade behavior at the contact between two domains.
Mintec Inc., based in Tucson, Arizona, USA, introduced MineSight Reserve, part of its MineSight software platform, in March 2013. Reserve features a new and completely integrated reserves calculation and reporting engine, called the Unified Reserves Engine, or URE throughout MineSight.
URE, according to Mintec, supports 3-D block modeling and stratigraphic models and improves the user’s ability to classify reserves.
Ventyx’s MineScape Block Model provides a sophisticated working environment where geologic rules are defined for local geology. The deposit model is built by progressively introducing geologic elements through loading of physical interpreted shapes or interpolation using material associations and/or zone following with a selection of algorithms. The model can be displayed at any time to validate the model construction process. The completed model becomes the base for reserves and other mine planning work, allowing classification of reserves by level, material type, polygon, wireframe and any block model attribute.
Carlson Geology, part of Carlson Software’s Mining 2014 package, is designed to allow users to manage drillhole data, plus calculate strata models, block models, quantities and qualities. According to the company, the process from importing drillholes, validating the data and modeling the ore to reserves calculations is seamless. For drillholes, Carlson Geology enables users to produce accurate models, automate data, turn out reports quickly and easily, differentiate by quality and tonnage, and analyze for compliance. The most recent version of Geology provides users with the ability to run Surface Mine Reserves more than three times faster, according to the company.
Ottawa, Canada-based software developer ThreeDify’s Excel CoreBlock, previously known as Excel CoreViz, is a member of the ThreeDify GeoOffice Suite. CoreBlock is a 3-D drillhole data visualizer and a simplified resource estimator deployed as an add-in to Microsoft Excel.
CoreBlock consists of two modules that can be licensed separately:
- The CoreViz module offers interactive 3-D drillhole data visualization within Microsoft Excel.
- The BlockModel module features a Radial Basis Function (RBF)-based implicit modeler. It allows the user to quickly create and export 3-D block models of grades and wireframes (as iso-grade surfaces or solids). The BlockModel module also allows the user to classify resources into measured, indicated and inferred classes.
According to the company, CoreBlock was created not just for geologists, but also for other stakeholders, such as investors, fund managers and property owners. CoreBlock-powered Excel worksheets or animation videos exported by CoreBlock can be shared without resorting to other expensive geological modeling packages.
ThreeDify GeoOffice Suite is a strategic project that aims to seamlessly integrate ThreeDify mining software solutions into the Microsoft Office workflow to increase user productivity.
