Watch out, writedowns! An exciting but not good week of earnings ahead for gold mining stocks

07/19/2013 3:32 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Next week promises to be an exciting one for the shares of gold mining companies as the industry sends a stream of top players to the plate for earnings season.

But not necessarily exciting in a good way. The excitement will come from seeing which gold miner announces the biggest write down of its assets and which surprises Wall Street by reporting even bigger write downs than expected.

That might take a bit of doing. Australia’s biggest gold miner, Newcrest Mining (NCM.AU in Sydney) has noted that it will take a charge of as much as $5.5 billion to write down assets in the second quarter. Kinross Gold (KGC), which took a $3.1 billion write off on a mine in Mauritania in February, has announced a second quarter $720 million charge to write down a mining project in Ecuador. Barrick Gold (ABX) has said it will write down as much as $5.5 billion on its Pascua Lama project in the second quarter and take other, so far, unspecified but “significant” impairment charges in the quarter.

As of July 1 Bloomberg had added up $17 billion in write-downs announced by gold miners over the last 16 months. And the second quarter will add to that total. With gold selling for less than $1300 an ounce even after a decent rally that started on June 27, many gold mining companies are carrying assets on their books at values well above current prices. Writing down the value of those assets plus writing off the value of projects that have been delayed or cancel guarantees more big charges.

As painful as these write offs will be, they are an essential part of creating a bottom for gold and the gold mining sector. Until mining companies wipe out valuations that are a relic of gold at $1600 to $1700, it will be hard to attract value investors to the sector. Buying by value investors is a necessary first step in any recovery in share prices for the sector. Another round of write offs that includes project delays or cancelations would also help put a floor under gold prices by demonstrating a contraction in future supply.

The sector touches off earnings week with Newmont Mining (NEM) and Goldcorp (GG) on July 25 followed by Yamana Gold (AUY) and Kinross (KGC) on July 31. Barrick Gold (ABX) is scheduled to report on August 1. (Yamana and Goldcorp are members of my Jubak’s Picks portfolio http://jubakpicks.com/  )

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund owned shares of Newcrest and Yamana as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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