AngloGold’s rating at S&P cut to ‘junk’
ANGLOGOLD Ashanti’s rating was cut to BB+, commonly called “junk bond” status, by ratings agency Standard & Poor’s (S&P) on Wednesday because the $500/oz drop in the gold price this year has heightened the miner’s financial risk profile.
Future borrowings raised through the issuance of bonds will be more expensive and the pool of potential funders will diminish because some investment houses regard anything rated lower than BBB-as too risky.
The matter is not entirely clear cut though as ratings agency Moody’s still has an investment grade rating on AngloGold despite downgrading its rating for the company last Friday.
S&P, however, downgraded AngloGold into the top tier of sub-investment grade ratings yesterday, highlighting its concerns about rising debt levels in the world’s third-largest gold miner, and the “high sensitivity of credit metrics to the current low gold prices”.
Percy Takunda, an analyst at Imara SP Reid, said the downgrade was not ideal.
“This will make future borrowing more expensive for AngloGold. It is not ideal to have a sub-investment rating,” he said.
AngloGold said this week it was embarking on a road show to see fixed-income investors ahead of “plans to access the capital markets with a US dollar senior notes offering at a date to be announced in 2013”.
How much it wants to raise, or for what reason, is unclear at this stage, but the company does have a $733m convertible bond falling due in May next year.
The 52% fall in the share price this year to levels last seen in 2001 largely rules out anyone converting the bond to shares.
AngloGold may opt to pay out cash, raising long-term debt via a bond to generate the capital.
“It’s going to be much tougher to raise money with this downgrade. It is a sign of the times, not just for AngloGold but for most gold producers,” Peter Major from Cadiz said.
On Monday, AngloGold unveiled news of an asset write-down of between $2.2bn and $2.6bn, production cutbacks and cost-cutting exercises stemming from a review of its entire business. New CEO Srinivasan Venkatakrishnan has already told the market that the company was undertaking an extensive review of its mines and capital expenditure because of the state of the market.
S&P took note of these actions as did Moody’s, but both said it would take time for the benefits of these “aggressive measures” to take effect.
“However, while positive in the longer term, a lot of these actions won’t have any measurable impact until 2014 and may not be enough to stabilise operating margins and operating cash flow, especially if the gold price continues to decline,” said Moody mining analyst Dion Bate.
S&P warned that its negative view of AngloGold could worsen if talks with unions over wages resulted in higher wages. Seven companies, including AngloGold, have offered unions a 4% wage hike at centralised talks against demands for increases ranging from 100% down to 10%.
Moody’s said if there was a strike between this month and September, shutting AngloGold’s South African mines, and if the gold price was about $1,200/oz, AngloGold could well breach debt covenants.
“However, we believe that AngloGold will take proactive steps of any covenant breach to reassure its lenders and circumvent the possibility of the facility being called,” Mr Bate said.
There would be a further downgrading of AngloGold’s rating if South Africa’s country risk was increased by the government pushing royalty payments higher, S&P said.
Source: Business Day
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