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68 E&MJ; • MARCH 2014 www.e-mj.com O P E R AT I N G S T R AT E G I E S Take Advantage of Tech Tools for Reserves Calculations 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 in- vestors 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 bil- lion 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 produc- ers 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 com- panies' 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 tan- dem 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 general- ly 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 com- panies used to calculate their economical- ly 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 invest- ment 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 esti- mation 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 soft- ware geostatistics solution. The company said Isatis Vario Pack is intended for re- source-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 represen- tations; and EMJ_pg68-69_EMJ_pg68-69 2/27/14 12:03 PM Page 68