Moody’s Investors Service has downgraded Goldcorp’s (TSX: G; NYSE: GG) senior unsecured ratings one notch above junk status, while confirming its ratings for Barrick Gold (TSX: ABX; NYSE: ABX), AngloGold Ashanti (NYSE: AU) and Newmont Mining (NYSE: NEM).
Moody’s put the four gold majors under review in January, as part of an effort to reassess the credit ratings of 55 mining companies, due to declining commodity prices.
On March 11, it slashed Goldcorp’s credit rating to Baa3 from Baa2, citing lower profits, reduced production forecasts and management changes.
“The downgrade of Goldcorp’s rating reflects the deterioration of its profitability and coverage metrics, and our expectation that they will remain weak through 2016, combined with minimal free cash-flow generation at a [US]$1,100 per oz. gold price,” stated Jamie Koutsoukis, Moody’s vice-president and senior analyst.
In late February, Goldcorp revealed a US$4.2-billion net loss in 2015, including a fourth-quarter impairment charge of US$3.9 billion, largely owing to weak gold prices. It guided annual production for the next three years of 2.8 million to 3.1 million oz., down from 3.5 million oz. produced in 2015. This was driven by lower expected output at its older mines, such as Penasquito in Mexico, recovery issues at the new Éléonore mine in Quebec and deferred development of the Cochenour mine in Ontario. The company’s gold reserves fell 18% year-over-year after using a US$1,100 per oz. gold price assumption.
It released these shortcomings just days before new president and CEO David Garofalo, formerly at Hudbay Minerals (TSX: HBM; NYSE: HBM), took the top job from Chuck Jeannes, who retired.
The headframe at Goldcorp’s Éléonore gold mine in Quebec. Credit: Goldcorp
Reflecting on Goldcorp’s 2015 financials and share price performance, Garofalo said the company is taking steps to rebuild shareholder confidence. “We take responsibility for that. And we’ll take responsibility for ensuring that it doesn’t happen again by having the appropriate accountabilities,” he told reporters in early March.
Goldcorp is transitioning to a decentralized organization, increasing the responsibilities of mine managers to drive returns at their operations, supported by a leaner executive team.
As part of its senior management changes, announced on March 9, Russell Ball, vice-president of corporate development and capital management, became Goldcorp’s chief financial officer. He replaced Lindsay Hall, who left to pursue other interests, similar to Charlie Ronkos, senior vice-president of exploration, who is also leaving the company.
Meanwhile, Goldcorp will look for two regional chief financial officers to support its North American and Latin American businesses in new roles, while closing its regional exploration office in Reno, Nev.
Commenting on the changes, Moody’s says it heightens the risk that the company may step away from its “conservative financial policies.” That said, Moody’s applauded Goldcorp’s strong balance sheet. The company exited 2015 with US$326 million in cash, and a fully available US$3-billion revolving credit facility.
“With expected capital spending of US$900 million and its reduced dividend, or US$90 million in 2016, we expect Goldcorp to be slightly cash flow positive through the year using a price sensitivity of US$1,100 per oz.,” the agency said.
But it assumes a negative outlook on Goldcorp’s ratings, noting the company faces difficulties in improving its profitability due to reduced mine performances and the risk that lower gold prices could lead to negative free cash flow.
Meanwhile, Moody’s has kept its Baa3 credit ratings on Barrick, given its efforts to reduce debt. Barrick brought its debt down by US$3 billion in 2015, with another US$2 billion in reductions planned for 2016.
“They have good assets and excellent liquidity, but leverage is high and they need to continue executing on plans to address it in a meaningful way,” Koutsoukis said. Because there’s a risk it might not reach its reduction targets, Moody’s has a negative outlook on the company’s ratings.
Moody’s also confirmed AngloGold Ashanti’s Baa3 and Newmont’s Baa2 ratings. It has a stable outlook on both.
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