Kingsgate writes down Challenger gold mine assets

Another writedown from the disappointing gold miner.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published July 1, 2013 8:15 am AEST

Kingsgate Consolidated (ASX: KCN) last week became the latest Australian mining company to update the market during the traditional 'confession season' leading up to the end of the financial year.

Kingsgate advised that it would take a $300 million impairment charge against its South Australian Challenger gold mine due to the recent slide in gold prices. In order to combat the drop in gold price, the company will lower production volumes but target higher grade ore. The update sent Kingsgate shares to a five-year low of $1.24 on Friday, a steady decline from a high of $12.30 in mid-2010 following a series of disappointing profit results in recent years.

Gold miners such as Kingsgate and Newcrest Mining (ASX: NCM) have watched the gold price fall from above US$1600 in April to below US$1200 last week. The drop has resulted in severe margin compression leading to profit and broker downgrades. Newcrest alone has advised of $6 billion in asset writedowns this financial year.

To combat this, gold miners have aggressively targeted costs and production efficiency. In the update, Kingsgate stated that it will achieve this by cutting mine development costs by up to 30% and will process only the higher grade ore at the site's west ore body. This is expected to improve margins in the short term.

Additionally, jobs will be cut at the site as work shifts from underground development to batch processing over the first three months of the next financial year. The cumulative effect of the changes is expected to make the mine cashflow positive by the end of September 2013.

Foolish takeaway

Last week's update by Kingsgate is the latest in a series of disappointing results from Kingsgate which has seen its share price drop 75% in the past 12 months. The drop in the gold price is affecting the margins of all gold miners, however Kingsgate's Challenger mine is losing money at the current gold price and remedial action may be worthless if it continues to fall. Investors looking for exposure to gold may be better rewarded investing directly in the metal via the ASX-listed Gold ETFs (ASX: GOLD) security.

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Motley Fool contributor Andrew Mudie owns shares in Kingsgate.

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