The anticipated unwinding of US quantitative easing and expectations of improving but unspectacular economic growth leave little room for a rebound in gold prices over the next few years, while a further decline remains a real possibility, Fitch Ratings says.
Our ratings of gold producers incorporate a base case gold price assumption of USD1,200 per troy ounce for the next two years, but a stress scenario of USD1,000/oz would put some gold miners' ratings under significant pressure without substantial cost cutting and cash conservation measures.
Our base case price is in line with the industry's "all-in-sustaining" cost guidance for 2013. However we do not see USD1,200/oz as a price floor because recent price trends have been influenced far more by the use of gold as a financial instrument and a hedge against inflation than by industrial demand. Given the change in sentiment as central banks signal unwinding of economic stimulus, we recognise it is possible that the gold price could find a new floor below this level for an extended period. The gold price has currently settled above USD1,300/oz.
We have reviewed our portfolio of gold producers following the recent sharp drop in prices, but have not taken any rating actions because we believe that, under our base case, companies have sufficient flexibility to reduce their operating cost base and capex plans. We also expect producers to reassess their dividend policies.
The USD1,000/oz stress case is not used to determine ratings, but is a useful tool to assess the flexibility companies would have amid persistent weaker prices. Rising leverage would be inevitable in this scenario with Kinross (BBB-) and Nord Gold (BB-) showing peaks in 2014. Buenaventura (BBB) peaks in 2015 due to its projected investment in affiliates and brownfield expansion projects under this price scenario.
Polyus Gold (BBB-) would probably remain the least leveraged Fitch-rated gold miner. But it would also probably see the biggest impact on EBITDA, due to the location of its production assets in regions of Russia with poor infrastructure and severe climate conditions, which would limit the potential for additional cost savings.