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Gold price's decline credit negative for SA mines, says Moody's

Monday, 27 July 2015
THE decline in the gold price is credit negative for South African gold mining companies AngloGold Ashanti Limited and Gold Fields Limited because it will lower their revenues, global rating agency Moody’s said in a report on Monday.

On Friday, gold closed at around $1,091 per ounce, more than $230 below its 52-week high and driven by increasing prospects of rising US interest rates, a stronger dollar and heavy selling in China and India, the biggest gold markets.

AngloGold Ashanti, which is rated Baa3 negative by the agency, and Gold Fields, rated Ba1 negative, will need time to adjust operations to this lower price level, Moody’s said.

Gold Fields will suffer more because the company calculates the value of underground gold reserves at $1,300 per ounce. The company’s 15% free cash flow margin target at this level infers a cash flow break-even at its mines of $1,105 per ounce. Below this level, the company’s leverage rises, with net debt increasing as the company uses up cash and committed banking lines and Ebitda declines, the rating agency added.

It said AngloGold Ashanti’s free cash flow will weaken as a result of lower gold prices, despite the company being on a stronger footing following its sale of a US mine. The company’s free cash flow generation has been negative over the past few quarters, notwithstanding onetime shutdown costs for its high-cost, cash-draining Obuasi mine in Ghana and money lent to a South African gold refiner.

Over the past few months, gold prices in US dollars have declined faster than US dollar-based mine costs. This relationship has reduced Ebitda and cash flow generation for both companies, Moody’s said.

Additional above-inflation cost pressure has added to the companies’ challenges on a number of fronts including electricity and labour. Although Gold Fields recently reached a three-year wage settlement with workers, AngloGold Ashanti and other South African gold miners continue to negotiate with trade unions. Lower gold prices will complicate those talks.

"At a gold price of $1,100 per ounce, we forecast that AngloGold Ashanti will not exceed its rating downgrade guidance of debt/Ebitda of more than 3.25x and cash flow from operations/dividends of less than 20%. We forecast the same for Gold Fields, whose downgrade guidance of net debt/Ebitda of more than 2.0x and cash flow from operations/dividends of less than 30% also will be untouched," the rating agency said.

This assumes the companies react as quickly in right-sizing their operations to profitability as they did in 2013, when gold prices tumbled unexpectedly. Liquidity and the ability to generate cash flow from operations will weaken as the companies reduce costs, a process that normally takes three to six months to take effect, Moody’s said.

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