Falling metals prices are exacting a heavier toll on Australia's mining sector--once the engine of the country's economy--with two mid-sized producers becoming the latest to warn of hefty impairment charges.
OZ Minerals Ltd., which runs one of Australia's largest copper mines, and gold producer Evolution Mining Ltd. Monday warned of a combined hit to their bottom lines of up to 640 million Australian dollars (US$593 million). Each blamed the looming writedowns on sharp falls in prices of commodities like gold--Australia's third-biggest export--as the U.S. edges toward tighter monetary policy and China's economy cools.
Mining companies in Australia are moving aggressively to counter slower demand for commodities and protect their balance sheets by closing unprofitable mines, laying off workers and selling assets. But the scale of the industry downturn has exposed another problem: mines and resources were worth vastly more in the boom years than now.
In a major move, Australia's largest-listed gold producer Newcrest Mining Ltd. (>> Newcrest Mining Limited) last month warned it may write down the value of its assets by as much as A$6 billion in response to a steep fall in precious metal prices. Other miners, including Rio Tinto PLC (>> Rio Tinto plc), have taken impairment charges on assets bought when commodity prices peaked.
"There is an air of inevitability" around asset writedowns given the scale of the commodity price falls recently, said Tim Schroeders, a fund manager at Australia's Pengana Capital. "But it's no doubt going to cause a bit of pain, particularly for gold producers."
The spot price of gold has fallen around 20% since the start of January as investors abandoned the metal on expectations the U.S. would soon begin tapering its monetary easing program--a key driver of gold-price gains in the latter years of its 12-year bull run.
Copper prices have also declined sharply this year as financial markets fretted over the economic slowdown in China, the top buyer of base metals. Copper on the London Metal Exchange has fallen 14% so far this year.
Melbourne-based OZ Minerals, which owns the Prominent Hill copper-and-gold mining operation in South Australia state, said it expects to record an impairment charge of up to A$240 million when it releases its half-year results Aug. 14.
"The anticipated asset impairment has arisen due to a combination of factors, including lower expected prices for copper and gold, particularly in the near term," the company said in a filing.
Evolution Mining, which counts Newcrest as its biggest shareholder, said separately it expects to write down the value of its assets by up to A$400 million.
"Recognizing a change in the gold price and sentiment for the gold sector, we have reviewed the carrying value [of Evolution's assets] and believe they should be written down," Executive Chairman Jake Klein said on a conference call. "It doesn't reflect our confidence in the future of these assets."
At their lowest, shares in OZ Minerals were down 3.4%, and Evolution down 6.0%. They closed down 2.0% and 1.2% respectively.
Mr. Schroeders said he wouldn't be surprised to see more writedowns before resources companies report earnings next month.
Some of the world's biggest resources companies have already written down the value of assets as the global mining boom slowed. In January, Rio Tinto said it would book a US$14 billion charge against the value of its troubled aluminum division as well its coal assets in Mozambique. BHP Billiton Ltd. (>> BHP Billiton Limited) and Anglo American PLC (>> Anglo American plc) have also taken impairment charges against some assets this year.