Kevin Crowley
GOLD Fields would prioritise debt reduction in the next three years as it prepared itself for surprise drops in the spot price of gold, executives have said.
The Johannesburg-based mining firm planned to cut its net debt to one times earnings before interest, tax, depreciation and amortisation (Ebitda) by 2017, from 1.47 times in the second quarter, chief executive Nick Holland said on August 21. Gold Fields’s banks limit its net debt to 2.5 times Ebitda.
Gold Fields, which owns mines from Australia to Peru, is seeking to boost cash flow from its international operations by cutting costs after it spun off three aging, yet cash-generative South African operations last year. By paying down debt, the company plans to protect its balance sheet from a decline in the price of bullion, which fell 28 percent last year, the biggest annual drop since 1981.
“We’re in a strong position to be able to aggressively pay down our debt even at current prices. We’re in good shape to possibly beat that target,” he said, referring to the 2017 plan.
While gold has climbed 7.3 percent this year, it is still down 23 percent since the start of last year. Gold was fixed at $1 285.75 an ounce in the afternoon on Friday, down $6.25.
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The problem is at 1.5 [times Ebitda], if something goes wrong in the industry, very quickly you can be at 2.5 and that’s not a comfort zone,” chief financial officer Paul Schmidt said, referring to Gold Fields’s net debt covenants of 2.5 times Ebitda. “Then the banks are all over you. As with some of our peers, they force you to do stupid things to try and fix up your financing, either doing rights offers or ridiculously priced bonds.”
The yield on Gold Fields’s $1 billion (R10.7bn) of bonds due in July 2020 has increased 51 basis points since July 1 to 7.01 percent. That compares with a 7 basis-point advance in the average rate on emerging-market metal and mining companies’ bonds, JPMorgan Chase indices show.
Gold Fields increased cash flow 20 percent to $65 million in the second quarter, compared with the previous three-month period, boosted by higher production at its Australian operations.
“In
the absence of debt-funded acquisitions, Gold Fields has the capacity to reduce” the net debt ratio to equal Ebitda by 2017, Douglas Rowlings, a credit analyst at Moody’s Investors Service, said on Thursday. It was “moderately positioned relative to its peers” with gross debt of 2.21 times Ebitda. – Bloomberg