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TEXT-S&P:Summary: Gold Fields Ltd.
The ratings on South Africa-based gold producer Gold Fields Ltd. (GFI) reflect Standard & Poor's Ratings Services' view of the company's "satisfactory" business risk and "intermediate" financial risk profiles, as our criteria define these terms.
GFI's key business profile is supported by its position as the world's fourth-largest gold producer (with about 3.7 million ounces in 2011); long reserves life of more than 20 years; and healthy gold price. These strengths are partially mitigated by GFI being a single commodity player and having inherently unfavorable unit cash costs, when compared with key North American gold miners and its closest peer, AngloGold Ashanti Ltd. (AGA; BBB-/Stable/--; South African national scale rating zaA/zaA-1), due to inflationary pressure, the weakness of the U.S. dollar against commodity currencies, and the lack of significant by-products. The ratings are further constrained by country risks, notably in South Africa where 36% of GFI's EBITDA is generated and where discussions regarding government policy toward the mining sector are ongoing within the ruling party. In our view, the geographical diversification is not likely to change materially over the coming years.
Our assessment of GFI's key financial profile factors in its current low leverage; a moderate financial policy that dictates a debt-to-EBITDA ratio of less than 1.0x; "adequate" liquidity that can support GFI's operations under our conservative price assumptions; and the company's willingness to cut down capital expenditure (capex) and production in order to cope with a potentially lower gold price. These factors are mitigated by the company's probable expansionary projects over the coming years, which are likely to lead to negative free operating cash flow (FOCF), under a more prudent gold price.
S&P base-case operating scenario Gold stills plays an important role as a safe haven at a time when investors fear a double-dip recession in the European Economic and Monetary Union (eurozone) and another U.S. central bank quantitative easing program. As a result, gold prices remain very volatile (trading between $1,319/oz and $1,895/oz during 2011). The current price is $1,600/oz.
Under our base-case credit scenario, we project that GFI will generate EBITDA of South African rand (ZAR) 16.9 billion ($2.0 billion) in 2012, somewhat below the EBITDA of ZAR18.9 billion in 2011. This scenario takes into account:
-- A gold price assumption of $1,300/oz for the rest of 2012 (and an average realized price of $1,650/oz for the year to date), reflecting high volatility and low predictability of the price of gold, which is susceptible to changes in investors' sentiment.
-- Total attributable production of 3.5Moz (actual total attributable production of 1.7Moz in the first-half of 2012). We assume the additional production expected from the South Deep mine (approximately 50Koz-70Koz), will cover the slow deterioration in output from some of GFI's other mines. That said, South African safety stoppages and other one time issues, as seen recently at GFI's flagship Kloof Driefontein Complex (known as KDC), could lead to lower production levels.
-- Cash costs of $840/oz, reflecting an increase by 20% driven by electricity prices, labor costs, general mining inflation, and the deterioration in ore grades. On the other hand, we factor in a more favorable foreign exchange (F/X) in our scenario of lower gold prices (that is, the strength of the U.S. dollar against commodity currencies, notably the South African rand) in the case of a quicker-than-anticipated recovery of the U.S. economy.
-- Some flexibility in terms of exploration and corporate costs.
With a more-favorable gold price, of about $1,600/oz in 2012, we believe that EBITDA could reach ZAR19.3 billion. This is not our base-case scenario, however.
We believe that economic uncertainty over the medium term should support healthy gold prices, higher than miners' total cash costs (including exploration costs and sustainable capex). However, under our rating scenario, in the short term, we view a potential, temporary mismatch between the price of gold and GFI's cost-structure as the main risk, decreasing EBITDA materially, as per the assumptions above. In our view, GFI's cash position is weaker than those of other investment grade gold miners and could come under pressure if costs continue to increase without a parallel increase in the gold price. In our view, the cost position will improve, but not dramatically, after the completion of the South Deep mine.
Country risk, particularly risk related to possible changes in taxes and royalties, is becoming an ongoing challenge for the global mining industry. In GFI's case, the debates in South Africa regarding mining policy create some uncertainty (South Africa contributed 36% to GFI's EBITDA in 2011) but we consider it too early to quantify the possible impact. More positively, we have seen recent changes in the gold mining corporate tax regime in South Africa, and Eskom has announced that the electricity tariffs increase, scheduled for 2012 and 2013, will be lower than previously thought. However, these measures, in our view, are unlikely to improve cash flow to levels seen in past years; as GFI's tax expenses to the South African government were relatively small.
S&P base-case cash flow and capital-structure scenario GFI has a public objective of reaching a production under development level of 5.0Moz by 2015, from the current 3.7Moz. In order to meet this target, GFI will have to sustain current production at the existing mines and bring several new projects online (such as Chucapaka and Yanfoila, among others). We believe that the company will need to invest an additional ZAR6 billion-7 billion a year on top of the maintenance capex (which we estimate at $150-$200/oz per year, equivalent to ZAR5.0 billion-ZAR6.0 billion) in order to preserve the current production rate and ultimately reach its target. We understand that at this stage, none of the future projects--except for the South Deep project--were approved or funded by the company, giving the company flexibility if the gold price weakens as per our base-case scenario.
In this scenario, we assume GFI will be able to generate positive FOCF of ZAR0.3 billion in 2012, based on funds from operations (FFO) of ZAR14.2 billion and capex of ZAR14.0 billion. In 2011, GFI generated FOCF of ZAR4.0 billion. Under our conservative price deck assumption of $1,200/oz in 2013, we view GFI's weak cash position leading to negative FOCF, even under the assumption of taking on board its capex flexibility. On a positive side, we believe GFI has sufficient liquidity sources to cope with this scenario, before taking other extraordinary measures (for example, shutting down mines).
With total adjusted debt of ZAR11.8 billion on Dec. 31, 2011, the above results would translate into a very supportive FFO-to-debt ratio of 97% in 2012 and 42% in 2013. We view FFO-to-debt of 30%-35% over the business cycle as commensurate with the rating.
We view GFI's liquidity as "adequate" under our criteria. The company's short-term credit rating is 'A-3'. We estimate that the ratio of sources of liquidity to uses of liquidity as of Dec. 31, 2011, for the following 12 months will be more than 1.2x and more than 1.0x for the 12 months following. Our assessment reflects the $1 billion new revolving credit facility (RCF) GFI secured earlier this year and minor maturities in the next two years.
Under our prudent assumptions for gold prices in 2012-2013, and taking into account possible related changes in GFI's cash cost structure, we project the following sources of liquidity as of March 31, 2012:
-- Cash on balance sheet of about ZAR4.2 billion, after excluding ZAR1 billion cash that we consider is tied to operations;
-- Availability under the committed credit lines of ZAR9.5 billion, due 2016 and 2017; and
-- Cash flow from operations of about ZAR10 billion by the end of 2012 and about ZAR7.8 billion in 2013.
We project the following uses of liquidity as of March 31, 2012:
-- A ZAR11 billion capex program by the end of 2012 (ZAR14 billion for 2012) and a ZAR12 billion program in 2013. We believe the capex level in 2013 represents the required amount to maintain the current production level, as well as execute the South Deep project;
-- ZAR1.7 billion of dividends in 2012 and no dividends in 2013, assuming full flexibility to curtail dividends if cash flow becomes weaker. GFI did not have to stop dividends payments during the recent financial crisis, due to very supportive fundamentals.
The company has substantial headroom under its maintenance covenants, including net debt to EBITDA of 2.5x and EBITDA to interest of 5x.
The stable outlook reflects our view that, under our prudent price assumptions for gold, GFI can achieve minimal EBITDA of ZAR16.9 billion in 2012. This would allow the company to meet its capex and dividends needs with current sources of liquidity. We consider a ratio of FFO to debt of 30%-35% on a sustainable basis to be commensurate with the rating over the gold mining cycle. However, given current gold prices, we believe that FFO to debt of more than 50% in 2012 is more in line with the rating.
Negative rating pressure could arise if GFI's margins (gold price minus expenses minus maintenance capex) are lower than $150/oz for a prolonged period, leading to negative FOCF. This scenario could materialize if the gold price falls to $1,350/oz, costs increase by 20%, and F/X remains stable.
Conversely, we do not envisage upward rating potential in the near term, given the volatile nature of gold prices (which, in our view, are currently at a high point in the cycle) and GFI's relatively weak cash-cost position. In addition, positive rating action would require us to have more clarity on the new rules/tax windfall governing the mining industry in South Africa.
Related Criteria And Research
ll articles listed below are available on Ratings Direct on the Global Credit Portal, unless otherwise stated.
-- Standard & Poor's Revises Its Metals Price Assumptions For 2012, 2013, And Beyond, Jan. 16, 2012
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- Standard & Poor's Provides Mapping Guidance For Its South Africa National Credit Rating Scale, Dec. 7, 2007
-- Credit FAQ: Standard & Poor's South Africa National Scale Ratings, March 29, 2006
-- Economic Research: Global Economic Outlook: Growing Pains, March 15, 2012
-- Ratings On South African Mining Companies Currently Unaffected As Court Allows Claim For Silicosis Compensation, June 24, 2011
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