Gold Miner Gold Fields 'BB+/B' Ratings Affirmed; Outlook Stable

  • Ongoing operational difficulties at the South Deep mine and restructuring costs incurred at the Tarkwa mine resulted in weaker financial performance than expected in 2018.
  • However, we expect that the start of production at Gruyere and improving grades at Damang, and corresponding lower project capital expenditure (capex), should turn the company's free cash flows positive and improve its deleveraging prospects.
  • We are affirming our 'BB+/B' global scale and our 'zaAAA/--/zaA-1+' South Africa national scale ratings. We also affirmed the 'BB+' issue ratings on Gold Fields' senior unsecured debt.
  • The stable outlook reflects our expectation that Gold Fields will generate adjusted debt to EBITDA of slightly above 2.0x and funds from operations (FFO) to debt will revert to the low-30% area in 2019 and 2020.
JOHANNESBURG (S&P Global Ratings) April 24, 2019--S&P Global Ratings today took the rating actions listed above. The rating affirmation reflects our expectation that Gold Fields will maintain leverage commensurate with the current rating under our base case, despite weaker-than-expected performance in 2018. However, the financial profile has weakened slightly, reflecting uncertainty related to the long-term cash generation prospects of Gold Fields' South Deep operation in South Africa, as well as the additional reinvestment capex that has been incurred at other operations. We now forecast FFO to debt of 30%-35% (previously 35%-40%) and debt to EBITDA of 2.0x-2.5x for 2019 and 2020.
Following persistent underperformance against production targets at South Deep, the company restructured the operation during the second half of 2018, with the aim of consolidating mining activity to increase productivity focus and to align the cost structure to production levels. The restructuring is set to result in around US$60 million in annual operating cost savings and US$30 million in one-off capex savings, which should reduce ongoing cash losses. The company intends to gradually build production and unlock economies of scale post-restructuring. We expect the operation to remain free cash flow negative in 2019 with limited certainty on production and free cash flow thereafter.
Gold Fields' other operations in Australia, Ghana, and Peru continue to deliver in line with guidance. Excluding equity accounted joint ventures, Gold Fields' reported all-in sustaining costs (AISC) of $979 per ounce (/oz) and all-in costs (AIC) of $1,172/oz in 2018, which was skewed by South Deep, which recorded AISC of about $1,900/oz and AIC of about $2,000/oz.
Our assessment of Gold Fields' business risk reflects a unit cost profile that ranks towards the third quartile for gold miners on average, moderate geographic and asset diversity measured by production, and concentration of the reserve base and life of mine in South Africa. It also reflects volatile earnings and cash flows, owing to cyclical metal prices, operational setbacks experienced, and high capital intensity.
Gold Fields' financial profile reflects an expected pickup of cash flows in late 2019, as projects in Australia and Ghana begin to deliver, with a corresponding reduction in project capex, balanced by ongoing uncertainty at South Deep. Our earnings and cash flow estimates are underpinned primarily by our assumptions of stable gold prices and somewhat improving cash cost and production levels. On average, we expect FFO to debt will remain at 30%-35% (previously 35%-40%) and debt to EBITDA at 2.0x-2.5x. The company's medium-term net debt to EBITDA target remains at 1.0x (actual figure: 1.45x on Dec. 31, 2018, and equivalent to S&P Global Ratings-adjusted debt of 2.5x).
The company's earnings and free cash flow generation remain highly sensitive to changes in gold prices, production, and foreign exchange rates. However, Gold Fields has hedged 100% of forecast Australian production, 51% of forecast South African production, and 50% of forecast annualized fuel consumption in Australia and Ghana for 2019. This should protect cash flows against downside price and currency movements this year, as Gold Fields finalizes construction at Gruyere and builds up production at Damang.
Gold Fields has sizable upcoming debt maturities related to its term loan facility (US$380 million in June 2020), revolving credit facilities in Peru and South Africa (US$130 million 2020), and senior unsecured bond (US$850 million due in October 2020). While this has limited our liquidity assessment to adequate (previously strong), we understand that the company is making progress in extending its maturity profile, and believe it has well-established bank relationships and a generally high standing in the credit markets.
Gold Fields recently declared its maiden reserves at its "Salares Norte" project in Chile. It is concurrently undergoing an environmental impact assessment (EIA) approval process, for which feedback is anticipated in first-half 2020. The initial mine feasibility study indicates project capital costs of about US$850 million (as of fourth-quarter 2018) over a 2.5-3-year project development timeline. It also shows attractive average production levels, AISC/oz and returns over the life of mine.
In our opinion, the project could carry additional execution risks associated with greenfield projects when compared with the company's other projects, which are brownfield. Gold Fields is considering suitable project funding options (including a mix of debt, equity, and partnerships) and will still require board approval to proceed, should EIA approval be obtained. Financial headroom under the rating could narrow further if the project funding strategy results in elevated leverage outside our target range for a prolonged period.
The stable outlook on Gold Fields reflects our expectation that, while cash flow and leverage metrics weakened in 2018, the group's core credit metrics should remain in line with the rating in the longer term. Specifically, we forecast funds from operations (FFO) to debt of about 30%-35% (2018: actual 26.0%) and debt to EBITDA of about 2.0-2.5x (2018: actual 2.5x), on a multiyear average, under our base-case scenario. These forecast metrics are at the lower to middle part of the range for the rating category.
We may lower the rating if we believe Gold Fields is unlikely to maintain multiyear average credit metrics comfortably commensurate with the current financial risk profile (FFO to debt greater than 30% and debt to EBITDA less than 3.0x). This could result from greater-than-expected debt-funded capex on new projects, especially Salares Norte, or further unexpected operational issues, especially at South Deep. A lower-than-expected gold price, lower-than-expected production, or adverse foreign exchange movements could also result in more volatile earnings and cash flow.
Given Gold Fields' diversified mining portfolio, we do not think the rating would necessarily be constrained by the sovereign ratings in the countries where it operates. That said, country-related risks are an important factor in terms of royalties, taxation, regulation, and labor issues, among others, in Ghana (B/Stable/B) and South Africa (foreign currency rating BB/Stable/B).
We see limited ratings upside in the near term, given uncertainties inherent in the gold price and currency forecasts, combined with country-related risk factors. However, we could consider raising the ratings by one notch if the group improved leverage to comfortably below 1.5x and FFO to debt above 60%, combined with a sufficiently comfortable medium-term liquidity profile.
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