Isra-Mart srl: Moody’s upgrades Gold Fields’ outlook

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Moody’s Investor Services has upgraded Gold Fields ’ investment grade rating outlook from stable to positive, the precious metals producer said on Thursday.

Moody’s analyst Soummo Mukherjee said in a note that the change in Gold Fields’ Baa3 rating was mainly prompted by the miner’s continued progress in further diversifying its production and earnings before interest, taxes, depreciation and amortisation (EBITDA) geographically and becoming less dependent on its operations in SA.

According to Moody’s rating system, the Baa3 rating means Gold Fields is subject to moderate credit risk, at the lower end of the rating category. Ratings are an indication of how risky it is to invest in a certain country or share.

Mukherjee said Gold Fields’ presence in the country is exposing the company to above inflation electricity and labour increases, which continue to negatively pressure their operating margins.

"Additionally, the South African mining industry continues to face event risk from increased talks of the government considering nationalising its mines, as well as the threat from lawsuits due to silicosis, a type of lung-disease affecting miners," Mukherjee said.

Gold Fields remained committed to reducing its South African production from 50% to around 40% as it targets 5 million ounces in production or development by 2015.

Mukherjee also said the miner’s current Baa3 rating would likely be upgraded to Baa2 if the company demonstrated an ability to preserve the net debt to EBITDA ratio sustainably below times one and still generate positive free cash flow in a much lower gold price environment. Gold Fields would also have to achieve its cost reduction objectives to earn an upgrade.

"An upgrade would also require continued evidence that its main project, South Deep, continues on track and the company is able to maintain its national cash expenditure margins around 20% and continues to diversify geographically outside of SA," Mukherjee said.

Gold Fields latest quarterly report shows that its notional cash expenditure margin – operating costs plus capital expenditure – was 18% in the June quarter, compared to 9% in the March quarter.

Paul Schmidt, chief financial officer of Gold Fields said: "The change acknowledges Gold Fields’ increasing international diversification, solid operating margins, low financial gearing and conservative financial policy as well as our robust cash flow generation."