Overview
-- We believe that country risk for South African gold miner Gold Fields
Ltd. (GFI) has increased in light of continuing strike action in South Africa
and the possible implications of increasing social tensions for the mining
industry.
-- We recently lowered our foreign currency rating on South Africa to
'BBB' from 'BBB+' to reflect the deterioration in the social and economic
environment. The outlook remains negative.
-- We are therefore placing on CreditWatch negative our 'BBB-' long-term
corporate credit and senior unsecured debt ratings on GFI.
-- The CreditWatch placement reflects the possibility of us lowering the
ratings on GFI by one notch following our reassessment of GFI's business risk
profile in light of the increased country risk.
Rating Action
On Oct. 17, 2012, Standard Poor's Ratings Services placed on CreditWatch
with negative implications its 'BBB-' long-term corporate credit and senior
unsecured debt ratings on South African gold miner Gold Fields Ltd. (GFI). At
the same time, we placed our 'A-3' short-term corporate credit rating on GFI
on CreditWatch negative.
In addition, we raised our long-term South Africa national scale rating on GFI
to 'zaAA-' from 'zaA'. We affirmed our short-term South Africa national scale
rating on GFI at 'zaA-1'. Finally, we placed our long- and short-term South
Africa national scale ratings on GFI on CreditWatch negative.
Rationale
The CreditWatch placement reflects an increase in country risk for GFI in
light of continuing strike action in South Africa, and the possible
implications of increasing social tensions for the mining industry. The
lowering of our foreign currency rating on South Africa to 'BBB' from 'BBB+'
on Oct. 12, 2012, reflected this deterioration in the social and economic
environment. (See "South Africa FC Long-Term Rating Lowered To 'BBB'; LC
Ratings Lowered To 'A-/A-2'; Outlook Remains Negative," published on
RatingsDirect on the Global Credit Portal.)
The CreditWatch placement also reflects the rapid rise in GFI's unit cash
cost, which we already consider to be comparatively high. The cash cost could
increase further in the event of wage rises as part of the strike resolution,
or general inflationary pressure. At this stage, the steep weakening of the
South African rand currently offsets this inflationary pressure in part. On
average in 2011, GFI's unit cash cost was $767 per ounce of gold, compared
with the industry average of $600-$650 per ounce. The unit cash cost in the
second quarter of 2012 was $855 per ounce.
We are planning to reassess GFI's business risk profile in light of the
increased country risk and the possible further increase in the company's cash
cost. As a result of our reassessment, we could revise GFI's business risk
profile downward to "fair" from "satisfactory." The CreditWatch placement
signals a 50% probability that such a revision will trigger a one-notch
downgrade of GFI to 'BB+'. We plan to meet with management to ascertain
whether the company's modest financial policy can mitigate the increases in
country risk and cash cost. This policy aims to maintain debt to EBITDA at
less than 1x.
The current strikes caused GFI to idle two out of four of its South African
gold mines in September 2012. On Oct. 16, GFI gave the striking workers a
final ultimatum before dismissal, after which most workers in Beatrix returned
to work. In our view, the ultimate risk to GFI is from miners disregarding a
recent agreement and starting strike action at GFI's South Deep gold mine, its
flagship growth project in South Africa. This could result in GFI idling the
South Deep mine and delaying its plan for expansion. GFI's South African
operations contributed 36% of EBITDA and 49% of gold production in 2011. At
this stage, we do not have any visibility on how long the strikes will last
and, more importantly, on the nature of any future agreements between GFI and
the unions.
We view country risk for GFI as materially higher than for its North American
peers. We understand that the company's exposure to non-OECD countries is not
going to change materially over the coming years, as the company develops the
South Deep mine in South Africa and conducts feasibility studies at the
Chucapaca mine in Peru. On the other hand, the company has the ability to
reduce country risk over the medium term by developing its Australian assets
or its Arctic Platinum project in Finland.
Financially speaking, GFI has low leverage and we forecast that profits and
cash flows will remain strong, supported by prevailing high gold prices in the
context of quantitative easing and global economic uncertainty.
Under our base-case scenario, which assumes more prudent gold prices than
current prices, we believe that GFI's funds from operations (FFO) to debt will
be more than 40%-45% in 2013 and 2014, above the level that we consider
commensurate with an "intermediate" financial risk profile. Our base case
includes EBITDA of South African rand (ZAR) 15.0 billion in 2012, under the
hypothetical assumption that the strikes spread to all four mines and last
until the end of the year. This compares with EBITDA of ZAR20.0 billion in
2011 and ZAR9.5 billion in the first half of 2012. We assume that EBITDA falls
to ZAR13.0 billion in 2013.
We believe that GFI has some flexibility in terms of its future capital
expenditure (capex), as it has not yet approved or funded any of its projects
except for South Deep. That said, under our base-case scenario, we used the
company's long-term production target as the reference for future capex. In
our view, GFI will need to invest an additional ZAR6 billion-ZAR7 billion a
year on top of maintenance capex of about ZAR5.0 billion-ZAR6.0 billion in
order to fund all its projects. If approved, the higher level of capex would
translate into substantial negative free operating cash flow in the coming
years. Consequently, we do not exclude the possibility of GFI's Standard
Poor's-adjusted debt surging to more than ZAR21 billion in the coming years,
from ZAR12 billion at the end of 2011.
The raising of the long-term South Africa national scale rating reflects our
recent adjustment to our mapping guidance for the South African national
credit rating scale.
Liquidity
We assess GFI's liquidity as "adequate" under our criteria. The short-term
credit rating is 'A-3'. We estimate that the ratio of sources of liquidity to
uses of liquidity will be comfortably above 1.2x in 2013 and in 2014. Our
assessment is supported by small debt maturities until 2016; substantial
headroom under the current credit facilities; and the company's strategy to
attract funds before initiating new projects.
As of June 30, 2012, GFI had the following sizable liquidity sources:
-- ZAR6.7 billion of cash, excluding cash of ZAR1 billion that we
consider as tied to operations;
-- Availability under committed credit lines of ZAR6.2 billion due 2016
and 2017; and
-- Cash flow from operations under our base case of about ZAR17 billion
by December 2013 and ZAR11 billion in 2014.
We project the following uses of liquidity as of June 30, 2012:
-- Capex of about ZAR12.0 billion-ZAR13.0 billion per year to execute
projects in the pipeline. Assuming that spending on South Deep is not
discretionary, the company may have some flexibility to reduce capex in 2014
to about ZAR9.5 billion if need be.
-- ZAR1.7 billion of dividends per year, but we believe that the company
could reduce these if need be.
In our calculations, we did not factor in the company's ZAR1.5 billion fully
available revolving credit facilities that will mature in the coming six
months. Those facilities, provided by domestic banks, are likely to be
extended.
The company has substantial headroom under its maintenance covenants that
specify net debt to EBITDA of 2.5x and EBITDA to interest of 5x.
CreditWatch
We aim to resolve the CreditWatch placement by the end of December, after
meeting with management and gaining further insight into the company's ability
to reduce its exposure to country risk; to execute the South Deep project
according to current plans; and to maintain its internal policy of sustaining
debt to EBITDA at less than 1x. There is a 50% probability that we could
downgrade GFI to 'BB+' if we revise our assessment of its business risk
profile to "fair" from "satisfactory."
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
2012
-- Key Credit Factors: Methodology And Assumptions On Risks In The Mining
Industry, June 23, 2009
-- Standard Poor's Revises Mapping Guidance For South Africa National
Credit Rating Scale Following Sovereign Downgrade, Oct. 15, 2012
-- South Africa FC Long-Term Rating Lowered To 'BBB'; LC Ratings Lowered
To 'A-/A-2'; Outlook Remains Negative, Oct. 12, 2012
-- High Prices Mask A Difficult Future For Gold Miners, Sept. 11, 2012
-- Standard Poor's Revises Its Metals Price Assumptions For 2012, 2013,
And Beyond, Jan. 16, 2012
Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
To From
Gold Fields Ltd.
Corporate Credit Rating BBB-/Watch Neg/A-3 BBB-/Stable/A-3
Gold Fields Orogen Holding (BVI) Ltd.
Senior Unsecured Debt* BBB-/Watch Neg BBB-
Upgraded; CreditWatch/Outlook Action; Ratings Affirmed
To From
Gold Fields Ltd.
Corporate Credit Rating
South African National Scale zaAA-/Watch Neg/zaA-1 zaA/--/zaA-1
*Guaranteed by Gold Fields Ltd.
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
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