Goldcorp Inc. Downgraded To 'BBB' From 'BBB+' On Acquisition By Newmont Mining Corp.; Outlook Positive

  • Denver, Colo.-based gold producer Newmont Mining Corp. received shareholder approval for its acquisition of Goldcorp Inc., and will form as Newmont Goldcorp on close of the transaction.
  • As a result, S&P Global Ratings lowered its ratings on Goldcorp Inc. to 'BBB' from 'BBB+' to equalize the ratings and outlook with those on Newmont, and removed the ratings from CreditWatch, where they were placed with negative implications Oct. 30, 2018.
  • If Goldcorp's unsecured notes are exchanged for new Newmont's unsecured notes, we expect to rate these 'BBB', the same as our rating on Newmont's unsecured debt.
  • The positive outlook primarily reflects our expectation for Newmont to reduce acquisition-related leverage and generate positive free cash flow, enabling the company to maintain adjusted debt-to-EBITDA below 1.5x over the next two years.
TORONTO (S&P Global Ratings) April 15, 2019--S&P Global Ratings today took the rating actions listed above. Our downgrade on Goldcorp and removal from CreditWatch negative reflect the expected completion of Newmont's acquisition of the company. Newmont shareholders voted in favor of the deal, which we view as one of the final key hurdles for the transaction to close. Our ratings on Goldcorp are now equalized with those on Newmont. Newmont plans to exchange all existing Goldcorp unsecured notes with new Newmont unsecured notes, which we expect to rate 'BBB'. Following the completion of the transaction and notes exchange, Newmont will become Newmont Goldcorp.
Our ratings on Newmont are unchanged at 'BBB', which primarily reflects the company's significant annual gold production, with well-diversified output by mine and region, Newmont's long-term reserve base, and moderate leverage. We also take into account Newmont's cost profile, which we view as about in line with the global gold industry average. Moreover, its limited commodity diversification results in high margin and cash flow sensitivity to gold price fluctuations.
Newmont will be the largest gold producer globally, with annual gold production of almost 8 million ounces (compared with just over 5 million before the Goldcorp acquisition). We estimate the addition of Goldcorp's lower-cost assets in the Americas will improve Newmont's operating breadth, while maintaining a relatively attractive country risk profile. In addition, we don't foresee major integration challenges because mines are largely discrete, independent operations with little overlap with other mines.
The positive outlook reflects our expectation that Newmont will generate robust cash flow to lower its net debt leverage and reinvest to support output and costs. In addition, we believe the company will remain committed to strengthening its credit profile, supported by good free cash flow generation and potential proceeds from asset sales beyond this year.
We could revise the outlook on Newmont to stable if Newmont's debt-to-EBITDA increased to about 2x because of any combination of deteriorating earnings or a significant debt-financed initiative. We believe such a scenario is improbable in 2019, and we estimate this could occur only if gold margins dropped by about US$150 per ounce (/oz) in 2020 because of either lower prices or higher costs, although this would represent an unusually sharp deterioration. In addition, we believe Newmont would approach breakeven discretionary cash flow in the absence of reduced capital expenditures or dividends.
We could raise the rating on Newmont if we expect its adjusted debt-to-EBITDA ratio to remain below 1.5x over the next 24 months with continued positive discretionary cash flow (after capital expenditures and shareholder returns), which we believe would support a return to double-digit returns on capital after a five-year average in the low-single digits. In this scenario, we would expect the company to maintain reserve lives, production visibility, and margins relative to those of other investment-grade gold producers. The Goldcorp acquisition supports the improvement in asset quality, as Newmont sheds higher-cost, more capital-intensive operations that drag on returns, and moderates often lumpy capital expenditures.
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