Rationale
The ratings on South Africa-based gold producer Gold Fields Ltd. (GFI) reflect Standard
Poor’s Ratings Services’ view of the company’s “satisfactory” business risk and “intermediate”
financial risk profiles, as our criteria define these terms.
GFI’s key business profile is supported by its position as the world’s fourth-largest gold
producer (with about 3.7 million ounces in 2011); long reserves life of more than 20
years; and healthy gold price. These strengths are partially mitigated by GFI being a single
commodity player and having inherently unfavorable unit cash costs, when compared with key North
American gold miners and its closest peer, AngloGold Ashanti Ltd. (AGA; BBB-/Stable/–;
South African national scale rating zaA/zaA-1), due to inflationary pressure, the weakness of
the U.S. dollar against commodity currencies, and the lack of significant by-products. The
ratings are further constrained by country risks, notably in South Africa where 36% of GFI’s
EBITDA is generated and where discussions regarding government policy toward the mining sector
are ongoing within the ruling party. In our view, the geographical diversification is not likely
to change materially over the coming years.
Our assessment of GFI’s key financial profile factors in its current low leverage; a
moderate financial policy that dictates a debt-to-EBITDA ratio of less than 1.0x; “adequate”
liquidity that can support GFI’s operations under our conservative price assumptions; and the
company’s willingness to cut down capital expenditure (capex) and production in order to cope
with a potentially lower gold price. These factors are mitigated by the company’s probable
expansionary projects over the coming years, which are likely to lead to negative free operating
cash flow (FOCF), under a more prudent gold price.
SP base-case operating scenario Gold stills plays an important role as a safe haven at a
time when investors fear a double-dip recession in the European Economic and Monetary Union
(eurozone) and another U.S. central bank quantitative easing program. As a result, gold prices
remain very volatile (trading between $1,319/oz and $1,895/oz during 2011). The current price is
$1,600/oz.
Under our base-case credit scenario, we project that GFI will generate EBITDA of South
African rand (ZAR) 16.9 billion ($2.0 billion) in 2012, somewhat below the EBITDA of ZAR18.9
billion in 2011. This scenario takes into account:
— A gold price assumption of $1,300/oz for the rest of 2012 (and an average realized price
of $1,650/oz for the year to date), reflecting high volatility and low predictability of the
price of gold, which is susceptible to changes in investors’ sentiment.
— Total attributable production of 3.5Moz (actual total attributable production of 1.7Moz
in the first-half of 2012). We assume the additional production expected from the South Deep
mine (approximately 50Koz-70Koz), will cover the slow deterioration in output from some of GFI’s
other mines. That said, South African safety stoppages and other one time issues, as seen
recently at GFI’s flagship Kloof Driefontein Complex (known as KDC), could lead to lower
production levels.
— Cash costs of $840/oz, reflecting an increase by 20% driven by electricity prices, labor
costs, general mining inflation, and the deterioration in ore grades. On the other hand, we
factor in a more favorable foreign exchange (F/X) in our scenario of lower gold prices (that is,
the strength of the U.S. dollar against commodity currencies, notably the South African rand) in
the case of a quicker-than-anticipated recovery of the U.S. economy.
Continued…
