Updated 8/14/15 – Gold and silver prices are down in early Friday trading as gold futures see another dump. It’s important to remember that COMEX has sold around 130 ounces of “make-believe” gold, for every 1 oz. of physical gold that actually exists. Gold last reported p.m. Friday is $1114.20 and silver is $15.31.
As reported by Lawrie Williams from Mineweb, gold mining companies continue struggling to hold on while producing net losses.
We have noted here before the debt level mire that most of the world’s major gold miners have found themselves in after years of chasing growth when the gold price was strong and moving upwards.
However since late 2012 the gold price has been declining, but the major debt commitments – mostly relating to significant new mining projects and expansions which came to a peak thereafter – somewhat typical of the cyclical nature of mining industry economics. But in the views of many, this has led to the companies being overstretched financially (albeit not beyond their powers to dig themselves out of the financial pit thus created). The major credit rating agencies have been treating them accordingly, based on their current debt positions. This makes the companies less attractive in the eyes of the institutions and hedge funds and can lead to a downrated entity – particularly if it falls to non-investment grade (junk) status, then likely having to pay higher interest rates in servicing its debt.
The latest major gold miner to suffer the indignity of its credit rating being downgraded is Barrick Gold (ABX) – the world’s largest gold miner. Moody’s has downgraded its debt to Baa3 (but with a stable outlook), only one notch above what is reckoned to be ‘junk’ bond status.
In announcing the downgrade, Moody’s VP and Senior Credit Officer, Darren Kirk, stated, “Barrick has been downgraded because its leverage will remain elevated even after announced asset sales, material organic debt reduction is unlikely, and production will start declining in the next several years.”
The Moody’s rating downgrade brings it in line with the other biggest ratings agency, S&P, which had downgraded Barrick to BBB-, that agency’s equivalent of the Moody’s Baa3 rating, back in March.
While the ratings downgrade is perhaps more a blow to Barrick’s corporate pride than in having any serious effect on its finances, it does represent something of a warning shot across the bows. This has been mitigated to an extent by its outlook being reclassified as ‘stable’ up from ‘negative’ in its prior Moody’s Baa2 rating.
In announcing the debt downgrade, Moody’s did recognise that Barrick was taking steps to improve its debt position through asset sales and capital cutbacks. It added that Barrick’s financial strength was underpinned by its large scale, diverse and low-cost gold assets, sizeable copper operations, favourable geopolitical risks and excellent liquidity.
Indeed the agency expects that Barrick will achieve its debt reduction target of $3 billion by the end of 2015, and that the company will continue to take aggressive actions to further reduce its costs and capital requirements in response to the current, lower gold price environment. It estimates Barrick’s organic gold production will remain relatively stable through 2017, but then begin to decline as a result of its debt reduction moves.
It also states that Barick’s ‘stable’ ratings outlook assumes it will continue to make cost improvements a priority, and will continue to seek ways to reduce its debt and leverage through asset sales or other means, particularly should the gold price remain below $1,200 an ounce.
It further comments that an upgrade back to Baa2 status could occur should Barrick’s operating cash flows be able to fund the necessary investments to achieve at least stable production over time as well as sustain debt/ EBITDA below 2.5x and cash from operations less dividends/debt at around 30%. On the other hand, Barrick’s rating could be downgraded to Ba1 (junk status) if debt/ EBITDA appeared likely to be sustained above 3.25x and cash from operations less dividends/debt sustained below 20%.
Mining companies cannot continue producing gold and silver at negative income. If your’e considering investing in physical gold and silver, now is a great time to take advantage of mining company losses.
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