AngloGold Ashanti’s credit rating was downgraded to junk status by ratings agency Standard & Poor’s (S&P) yesterday.
The downgrade comes as the share price of the third-biggest gold producer has halved on the JSE since the beginning of the year.
S&P cut the rating following a significant drop in the gold price to $1 300 (about R13 000) an ounce from $1 700 an ounce at the end of last year.
“It also reflects our concern that AngloGold will generate more negative free cash flow and incur a more pronounced rise in debt with the current low gold prices than we had previously assumed,” the ratings agency said yesterday.
S&P lowered its long-term corporate rating on AngloGold to BB from BBB and said the outlook was stable.
AngloGold’s weak share price was a reflection of poor investor sentiment towards the company’s balance sheet. The shares gained 3.03 percent to close at R126 yesterday.
The shares had lost 2.5 percent on Tuesday after AngloGold announced it would take a write-down of as much as $2.6 billion on assets as a result of the slump in the gold price. It would also raise more debt.
It revised annual production guidance to between 4 million and 4.1 million ounces from earlier estimates of between 4.1 million and 4.4 million.
“Overall we need to hear AngloGold tell us about what it plans to do to reduce the pressure on its balance sheet in its results next week,” an analyst said. “We are going to see the company maybe selling its mines as it revises operations,” she added.
S&P’s rating cut follows a decision by Moody’s Investors Service to downgrade AngloGold because of the risk of a prolonged wage-related strike.
AngloGold now holds a Baa3 rating at Moody’s, the lowest investment grade, down from Baa2. Its outlook has worsened to negative from stable.
Increasing input costs, such as electricity and labour, coupled with labour unrest in South Africa were also regarded as a challenge by S&P.
“In our view, the highly volatile and difficult-to-predict gold price and the outcome of miners’ wage negotiations in South Africa will be the main drivers for AngloGold’s results in the coming quarters.”
Wage negotiations in the gold sector are expected to be tough considering the gap between the employers’ offer and the demands by unions.
The two main unions are demanding increases of between 60 percent and 100 percent and companies have offered an increase of 4 percent. S&P believed that gold prices would stabilise at around $1 350 an ounce over the coming 18 months.