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The plunge in gold prices hasn't put the gold sector's debt-laden major producers at odds with their credit raters – yet. But gold's retreat has exposed and deepened the cracks in some very large balance sheets.
Debt-rating giant Moody's issued a report Thursday saying that bullion's rapid retreat, from $1,800 (U.S.) an ounce last fall to barely over $1,200 earlier this month, won't trigger downgrades in its ratings on gold producers – but only because the rating agency was already using $1,200 as a long-term assumption for gold prices anyway. However, the drop in price has sharply elevated the leverage on the sector's balance sheets: At $1,200 an ounce, the sector has a debt-to-EBITDA ratio of 3.2 times – more than double its 2012 debt-to-EBITDA of 1.5 times. Canada's Barrick Gold Corp., the world's biggest producer, is looking at debt-to-EBITDA of 3.8 times at $1,200 gold.
Moody's warned that if gold prices persisted below $1,300 an ounce and/or became more volatile, "the ratings of several gold producers could go lower, since few of the rated miners could reduce costs quickly enough to offset sustained gold prices below $1,200 within the context of their current ratings." And it said that if producers expect to keep their current ratings, they had better cut their costs and scale back their plans.
"Gold producers … have geared their operations for a gold price that, until very recently, has been much higher. Consequently, our ratings incorporate our expectation that producers will realign their cost structures and capital spending budgets for today's lower-price environment."
That will entail putting the operating-cost genie back in its bottle. In the race to unlock new production and take advantage of the then-hot market for gold, producers until recently had increasingly pursued lower-grade deposits, and jacked up their costs. Many of the costs at those properties can't be reversed just because the price of gold has retreated. The only solution might be to idle high-cost production – something bigger producers may have the flexiblity to do, but smaller producers will find difficult.
Moody's said investment-grade companies such as heavyweights Barrick Gold Corp. ($14.1-billion (U.S.) of debt), Newmont Mining Corp. ($7-billion), AngloGold Ashanti Ltd. ($3.9-billion), Newcrest Mining Ltd. ($2.8-billion), Kinross Gold Corp. ($2.7-billion) and Goldcorp Inc. ($2.3-billion) "are larger and more diverse than their lower-rated peers," giving them "more flexibility to deal with low gold prices." Smaller, speculative-grade producers such as New Gold Inc. ($897-million of debt), Iamgold Corp. ($646-million), Eldorado Gold Corp. ($617-million) and Allied Nevada Gold Corp. ($575-million) will find it more difficult.
"But even the investment-grade gold producers have significant levels of leverage for their ratings," Moody's noted. Indeed, Barrick and Anglogold Ashanti already have negative outlooks on their ratings, and Newcrest is under review for a potential downgrade; it wouldn't take much for these debt ratings to be in additional jeopardy.
The danger for many companies is a natural reluctance to accept lower price levels for gold, against the risk that prices could remain low or even fall further.
"Producers do not typically change their behaviour quickly, since prices are volatile, and today most producers expect gold prices to eventually trend upward," Moody's said.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .