Moody’s: South African gold and platinum miners’ restructuring supports their credit profiles

JOHANNESBURG (Capital Markets in Africa) – The credit profiles of South African gold and platinum group metals (PGM) miners are benefitting from restructuring programmes that aim to protect the sustainability and profitability of their South African mines, Moody’s Investors Service said in a report today.

The report, “Metals & Mining — South Africa, Restructuring of South African operations is credit positive for gold, PGM miners”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

“South African mining groups’ restructuring initiatives will protect their credit quality by returning South African operations to a state in which they are free cash flow-generating,” said Douglas Rowlings, Moody’s Vice President — Senior Analyst and author of the report. “Improved free cash flow generation and accumulating offshore cash balances will be channelled towards expansion opportunities outside South Africa, reducing their operating risk profiles.”

These changes will also shore up the production profiles of gold miners following a cycle of underinvestment in reserves development since 2013, Mr Rowlings added.

The restructuring of South African operations will be positive for the credit profiles of AngloGold Ashanti Limited (Baa3 positive), Gold Fields Limited (Ba1 positive) and Sibanye Gold Limited (Ba2 stable).

The profitability of South African gold and PGM mining operations has been under increasing pressure due to the still low, but slightly improved, gold and PGM price environment.

Operating costs for gold and PGM miners, notably for electricity and labour, are heavily slanted towards denomination in South African rand. When the rand appreciates relative to the US dollar, costs in dollar terms increase. However, revenue is tied to the dollar, in which both gold and two-element (platinum and palladium) PGM prices are denominated. When the rand appreciates, this often causes already high South African mine operating costs to increase beyond the revenue received per ounce in dollar terms.

The rand has recently appreciated materially against the dollar, resulting in lower received gold and PGM prices in rand terms relative to an already high rand cost base. Further strengthening of the rand is likely to lead to further restructuring and closures of mines due to profitability coming under further pressure.

The continued lack of clarity and certainty over South African mining policy is increasing the risk attached to mining operations in the country, reflected in the continued lowering of South Africa’s investment attractiveness, according to the Fraser Institute, a Canadian thinktank.

Without a framework that provides policy predictability and certainty, Moody’s expects mining companies to keep a tight rein on capital expenditure.

Many mines’ useful lives could be extended with new equipment and infrastructure to reduce costs and improve entry to ore bodies. If the substantial expansionary investment required to reconfigure loss-making mining operations and make them profitable is not forthcoming, mines will either be restructured or closed.