Unbundling cuts Gold Fields rating
GOLD Fields’ credit rating was downgraded for the second time in two weeks yesterday, signalling the possibility of similar woes for other South African mining companies.
Standard & Poor’s (S&P) downgraded the credit rating to junk last month because of its exposure to South Africa.
Moody’s Investors Service cut the rating by one notch yesterday, indicating it had little confidence in the unbundling of Gold Fields’ ageing Kloof Driefontein Complex and Beatrix mines in South Africa from its international operations.
Gold Fields hived off the two South African mines to give shareholders alternative investment opportunities. It kept the South Deep mine.
The company is grappling with internal and external factors of declining ore grades, increasing cost pressures and uncertainty in the euro zone.
“If Gold Fields is downgraded all other mining firms are at risk, including AngloGold Ashanti, Anglo American Platinum, Lonmin and Impala Platinum,” Cadiz Securities analyst Peter Major said.
He said Gold Fields was in better shape than most companies that had high levels of debt. Its shares dropped 2.2 percent to close at R99.58.
Commenting on the downgrade to Ba1 from Baa3, senior Moody’s analyst Gianmarco Migliavacca said the unbundling would initially lead to an overall weaker credit profile.
“The rationale for the downgrade is driven by an overall weaker scale, geographic diversification and liquidity profile. The downgrade also reflects near-term deterioration of cash flow metrics, as the unbundled – more mature – assets contribute more positive free cash flow compared to the company’s South Deep mining project, which is still in a ramp-up phase and is therefore reporting negative free cash flow generation,” Migliavacca said.
Gold Fields spokesman Sven Lunsche said the company had commissioned a reassessment from Moody’s, which had indicated its intentions last week.
“We expected it [the ratings downgrade] and weren’t surprised, though their forecast of our future operational or financial performance is on the conservative side,” he said.
Moody’s said the outlook for Gold Fields’ ratings was negative because of the near-term deterioration of free cash flow and higher reliance on cash flows from its operations in Ghana in the short to medium term, until the South Deep project was complete and could contribute towards healthy positive free cash flows.
South Africa’s sovereign debt ratings were downgraded by Moody’s and S&P last month following unprotected strikes that spread from the platinum mining sector to the gold, iron ore and coal sectors, leading to a loss of production.
In October S&P placed AngloGold Ashanti and Gold Fields on credit watch negative, reflecting an increase in country risk as a result of the sovereign downgrade, and its perception that the social environment had deteriorated.
The downgrade marked the possibility that “the strike action by mineworkers would lead to an increase in the companies’ already comparatively high unit cash costs”, S&P said.
S&P also revised the outlook on Anglo American to negative from stable in October, reflecting the weakening business risk profile because of rising country risks.