Standard & Poor’s on Monday revised their outlook from negative to stable for miners AngloGold Ashanti and Gold Fields.
In two seperate statements, the ratings agency affirmed the miners’ ‘BB+’ long-term and ‘B’ short-term corporate credit ratings and the ‘zaA’ long-term and ‘zaA-2’ short-term national scale ratings.
“In addition, we affirmed our issue ratings on Gold Fields’ senior unsecured debt at ‘BB+’. The recovery rating on this debt is unchanged at ‘3’, indicating our expectation of meaningful recovery prospects for noteholders in the event of a payment default, in the higher half of the 50%-70% range.”
S&P said the outlook revision and ratings affirmation reflect stronger earnings and cash flows and strongly improved credit metrics for Gold Fields, thanks to debt reduction at Gold Fields in 2015 and a strengthening in the local currency gold price. Gold Fields is a major gold producer, with 2015 output of 2.2 million ounces (oz).
“Our view of Gold Fields’s business risk profile as fair reflects its profile as a single-commodity miner, but with asset and operating cost currency
diversity, above-average country risk, and high volatility of earnings and cash generation, both of which are sensitive to the price of gold and foreign exchange movements.
Gold Fields’ cost position materially improved in 2014 and 2015, down to US$1.007 per oz, through management’s initiatives and the benefit of commodity currencies’ depreciation.
“We have revised our financial risk profile assessment to intermediate, reflecting positive discretionary cash generation at current local currency gold prices (after sustaining capital expenditures and dividends) and core credit metrics in the higher end of the category. This assessment is also supported by management’s strong commitment to reducing debt.”
S&P said the stable outlook on Gold Fields reflects the improved gold price environment, notably when measured in local currency.
“It also reflects our expectation that the company should be able to maintain core credit metrics at the higher end of the intermediate category, namely funds from operations (FFO) to debt of around 40%, and debt to EBITDA below 2.5x, at current gold prices. We may adjust these targets depending on the price cycle.”
The ratinsg agency said that it may lower the long-term corporate credit rating if the company is unable to maintain credit metrics in line with their base case. This could result from a lower-than-expected gold price, adverse foreign exchange movements, or the company facing unexpected operational issues that result in weaker-than-expected or more volatile earnings and cash flow.
“Given Gold Fields’ diversified mining portfolio, we do not think the rating would automatically be constrained by the sovereign ratings in the countries where it operates. That said, country-related risks are an important risk factor in terms of royalties, taxation, regulation, labor issues, etc., in Ghana
(B-/Stable/B) and South Africa (foreign currency rating BBB-/Negative/A-3). Even if South Africa represents only a modest share of revenues, the South Deep mine development accounts for a major share of the company’s reserves.
S&P said it does not foresee ratings upside in the near term, given the uncertain gold price and currency forecasts, combined with country-related risk factors. However, it could consider raising the rating by one notch should the company maintain leverage comfortably below 1.5x and FFO to debt above 60%, as well as a sufficiently comfortable medium-term liquidity profile.
Regarding AngloGold Ashanti, which is the world’s third-largest gold producer, with an output of 3.9 million ounces in 2015, S&P also raised their long-term national scale rating on the subordinated medium-term note programme to ‘zaA-‘ from ‘zaBBB+’.
“We also affirmed our ‘BB+’ issue ratings on the company’s senior unsecured notes and revolving credit facility (RCF). The recovery rating remains ‘3’, indicating our expectation of recovery in the higher half of the 50%-70% range in the event of a payment default.”
S&P said the rating actions reflect the reduction in AngloGold Ashanti’s debt in 2015 and rising local currency gold prices, which led to stronger earnings, cash flows, and credit metrics. Moreover, the company’s all-in sustaining costs (all costs of sustaining gold production during a mine’s lifecycle) decreased in 2014 and 2015 to $910 per ounce.
The improvement was largely through management’s initiatives and benefits from depreciation of commodity currencies.
“Our view of AngloGold Ashanti’s business risk profile as fair reflects the company’s profile as a single-commodity miner with diverse assets and operating-cost currencies, but above-average country risk and highly volatile earnings and cash flows that are sensitive to the price of gold and foreign exchange movements. We continue to view country risk as an important rating factor because about 25% of the company’s revenue comes from South Africa, 38% from other African countries, 22% from Brazil and Argentina, and only 15% from Australia.”
S&P also views AngloGold Ashanti’s financial risk profile as intermediate, reflecting positive discretionary cash generation at current local currency gold prices, after sustaining capital expenditure (capex), but with no dividend payments.
“This is further supported by management’s strong commitment to reduce debt, as shown by the company’s target net debt-to-EBITDA ratio of below 1.5x. The
reported ratio as of Dec. 31, 2015, was 1.5x, which is equivalent to Standard & Poor’s-adjusted debt to EBITDA of 2.2x. The company’s earnings and free cash flow generation remain highly sensitive to changes in gold prices and foreign exchange rates, however.”
The stable outlook on AngloGold Ashanti takes into account the improved gold price environment, notably when measured in local currency, said the ratings agency.
“It reflects our expectation that the company should be able to maintain core credit metrics at the higher end of the intermediate category, with FFO to debt at about 40% and/or debt to EBITDA below 2.5x; these metrics may be recalibrated depending on the position of the price cycle.”
S&P added that it may lower the rating if the company cannot maintain credit metrics commensurate with an intermediate financial risk profile.
“This could result, for instance, from lower-than-expected gold prices, adverse foreign exchange movements, or unexpected operational issues that led to weaker or more volatile earnings and cash flow than we anticipate in our base case.”
Due to AngloGold Ashanti’s diverse mining portfolio, S&P said its ratings on the company are not currently constrained by the sovereign ratings on countries where it operates, including South Africa. However it noted that country risks are an important factor in our analysis, given royalties, taxation, regulation, potential labor strikes, or other social issues.
“Rating upside is currently unlikely because of the uncertain operating environment in South Africa, where the company’s operations continue to have higher-than-average costs, notwithstanding the rand’s steep depreciation.”
S&P said for it to consider a positive rating action, debt to EBITDA should remain comfortably below 1.5x and FFO to debt above 60%, and the company should maintain its strong liquidity profile.