MENU

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.

Are you looking for a high yielding stock? Click here now to get The Motley Fool’s special FREE report, 3 Stocks For the Great Dividend Boom. The report lists the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading


Motley Fool contributor Andrew Mudie owns shares in Kingsgate.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.