Kingsgate writes down Challenger gold mine assets

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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