Top 3 gold miners get ratings boost but Goldcorp cut
Gold mining's heavyweights all retreated on Friday as investors took profits and the gold price retreated from a 13-month peak of $1,288 hit early in the day. But the sector has indeed come a long way in 2016.
Rating's agency Moody's Investor Services in January said it's starting a review of a number of gold mining companies' creditworthiness for a possible downgrade which had the potential to cut the debt of big names in the sector to junk status. The top three escaped the dreaded junk status on Friday.
Barrick Gold Corp (NYSE:ABX, TSE:ABX) traded down 1.5% on Friday in late afternoon. After falling to its its lowest since 1989 in September, Barrick remains a top performing stock across all sectors in 2016 with a stunning 89% rise so far this year for a market value of $16.8 billion in New York, making it the most valuable gold mining company in the world.
Today Moody's affirmed Barrick's Baa3 investment grade which is one notch above speculative investment territory. The rating "is based upon the commitment of management to continue reducing debt and leverage" said Jamie Koutsoukis, Moody's Vice President, Senior Analyst. "They have good assets and excellent liquidity, but leverage is high and they need to continue executing on plans to address it in a meaningful way" she added.
Moody's expects Barrick will achieve its debt reduction target of $2 billion in 2016, following a $3 billion reduction in 2015, but the agency kept the outlook for Barrick negative however citing management's ability to execute on the deleveraging program.
Moody's recently said stress on companies in the industry "could surpass what it saw during the 2008/2009 period,” adding that the current downturn is like no other and "a wholesale recalibration of ratings is required.”
While others are disposing of mines, Newmont is building its portfolio
Newmont Mining Corp (NYSE:NEM) had retreated 2.5% in late trade on Friday affording the company a $14.7 billion market worth. Denver-based Newmont, the only gold company that forms part of the S&P500 index, is also having a great 2016, with a 48% rise since the beginning of the year.
Moody's also affirmed Newmont Mining's Baa2 grading on Friday adding that the outlook for the world's second largest gold miner is stable. One of the factors counting in Newmont's favour is its "relatively distinctive position in its ability, relative to others in the industry, to increase its gold production profile over the next several years."
While others are disposing of mines, Newmont is building its portfolio and last year acquired the Cripple Creek & Victor gold mine in Colorado for $820 million in cash from AngloGold Ashanti. Moody's also points to five key projects that are in execution stage:
"These include the Turf Vent Shaft project in Nevada, which achieved commercial operation in November 2015 and will add low cost production of between 100,000 and 150,000 ounces once fully ramped up, the Long Canyon Phase 1 project, to start up in the first half of 2017 and the Merian project in South America, expected to start up in late 2016. Once Merian reaches full production, it is expected to produce between 400,000 and 500,000 ounces of gold in its first five years of production.
"Based upon our sensitivity analysis with gold at $1,100/oz and copper at $2.15 pound, we expect Newmont to generate between $2 billion and $2.3 billion in EBITDA, remain free cash flow generative on reducing capital expenditures and continue to focus on debt reduction in 2016 and 2017."
Recent executive management changes creates a heightened risk the company could deviate from its conservative financial policies
Goldcorp was unable to escape a downgrade by Moody's which took the Vancouver-based company down one notch to Baa3, still an investment grade rating, but with a negative outlook. The agency cited "the deterioration of its profitability and coverage metrics and our expectation they will remain weak through 2016 combined with minimal free cash flow generation at a $1,100/oz gold price."
Another point of concern for Moody's were recent executive management changes which creates "a heightened risk the company could deviate from its conservative financial policies.” David Garofalo recently took the helm at the company replacing well-respected CEO Chuck Jeannes and this week Goldcorp announce CFO Lindsay Hall would be leaving the company.
Moody's also points to significant lower production guidance of 2.8 – 3.1 million ounces from 2016 to 2018 from about 3.5 million ounces in 2015 driven by production declines at older mines (Penasquito will fall to 550k oz in 2016 from 880k oz in 2015 due to ore grade), folding and recovery issues at the new Eleonore mine and deferred construction of its Cochenour mine.
American Depository Receipts of AngloGold Ashanti (NYSE:AU), the world's third largest gold producer in terms of output, also retreated giving the company a market value of $5.8 billion on the NYSE. AngloGold Ashanti, HQ'ed in Johannesburg, is up a stunning 89.7% since the start of the year and has more than doubled in value since hitting 16-year lows in August.
Moody's also affirmed AngloGold's Baa3 grading on Friday; also with stable outlook. The ratings agency points to a sizeable reserve base of 51.7 million ounces which "translates into debt to reserves of $53 per gold ounce, which compares favourably with similarly rated gold peers. The ratings further capture the company's widespread geographic disbursement of 17 mines in nine different countries on three continents:
"In addition, the rating is supported by a management team that remains committed to a transparent and conservative financial approach. Similarly, a long dated debt maturity profile along with proactive liquidity and mine configuration management provide shock absorption for unforeseen risks and allow the company time to take measures to appropriately align operations to unchartered operating conditions." Goldcorp (TSE:G, NYSE:GG) lost less than 1% in market value to $14.3 billion in New York on Friday bringing its year to date gains to a more modest (compared to its peers) but still impressive 41% for 2016.