What does it mean for investors?
According to accounting rules, companies have to periodically test the value of their assets. Most of the gold companies’ assets consist of mines. Mines are valued according to their proven production capacity, as well as possibilities for future exploration. The gold price influences the evaluation of a mine’s reserves.
One other big gold stock that could face a possible write-down is Barrick Gold Corporation (USA) (NYSE:ABX). The company is stuck with its Pascua-Lama project, which is situated in Argentina and Chile. The Chilean side banned the continuation of the work until Barrick Gold Corporation (USA) (NYSE:ABX) deals with the water-management system. The court has recently ordered to freeze the construction of the project that is valued $8.5 billion. However, the exact money spend would be bigger due to additional costs.
At the same time, Barrick Gold Corporation (USA) (NYSE:ABX) has significant debt on its balance sheet, which leads to a high 0.63 debt-to-equity ratio. No wonder the company is already selling its non-core assets. Barrick Gold Corporation (USA) (NYSE:ABX) has recently agreed to sell its energy unit for around $455 million. Barrick Gold Corporation (USA) (NYSE:ABX) needs cash to put more faith into its shareholders because it is likely to make a huge write-down on the Pascua-Lama project.
Write-downs were not a big surprise for market participants. The stocks of both Goldcorp Inc. (USA) (NYSE:GG) and Newmont Mining Corp (NYSE:NEM) did not react to the write-down news. Why? The write-down influences the balance sheet of the company, but it does not influence its cash flows. At current gold prices, the ability to generate cash is the most important factor.
Cash is king
The evaluation of the assets may change over time. The money is needed right now. Goldcorp Inc. (USA) (NYSE:GG) has generated $388 million of cash flow in the quarter. The company was unfortunate with the timing of gold sales.
