Barrick Gold Corporation (USA) (ABX): Expect Big Write-Downs in This Sector

The pending trouble

While gold price is falling, costs are not. Diesel prices aren’t falling right now. So these miners are looking uglier and uglier. In fact, the combination of costly past acquisitions together with a crash in prices is horrifying. Take Kinross Gold for example. In the first quarter of 2013, the company extracted and sold 650,000 ounces of gold at a total cost of $890 million. This translates into a cost-per-ounce of $1,370. This means that at today’s gold spot price of $1,237, Kinross Gold Corporation (USA) (NYSE:KGC) is actually losing $133 on each and every ounce it produces. That’s not a recipe for success.

And all the other gold miners are in the very same situation. If the current price environment continues, operating margins will be diminished. Barrick Gold Corporation (USA) (NYSE:ABX), for example, will see its operating margin drop from 44% at 2012 gold price level (of roughly $1,650) to only 25% at today’s level of $1,237.

The Fool looks ahead

Right now, trying to find value in gold miners is a very tricky (and costly) endeavor. I strongly recommend to let this falling knife fall, and only then — look for some value investments. Eventually, gold prices will stabilize and companies will stop writing down their assets. It’ll be a much safer bet.

The article Expect Big Write-Downs in This Sector originally appeared on Fool.com and is written by Shmulik Karpf.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Shmulik is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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