Are Credit Rating Cuts Dangerous for These Gold Miners?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The previous year was a tough one for gold miners like Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) , as gold prices declined from $1,700 to $1,200. However, this year could bring even more pain according to Moody's, which has just cut its forward view for the average price of gold in 2014 to $1,100 per ounce.

This is just a forecast, and the gold price could move either way. However, as Moody's is a rating agency, its own forecast could influence the credit ratings of gold miners. Lower credit ratings will make borrowing from debt markets more expensive for them. Is this a real threat?

Do these gold miners need more debt?
Both Barrick Gold and Newmont Mining already have elevated debt levels. Back in November, Barrick Gold has made an equity offering that caused a 16% share dilution. Despite the fact that the proceeds from the offering were used to repurchase debt, Barrick still owes more than $11 billion. According to Moody's, Barrick has a negative credit outlook, while the outlook for its peers Newmont Mining and Goldcorp (NYSE: GG  ) is stable.

Goldcorp is in a better position among major gold miners, as it has little debt. In addition, the company is reluctant to go shopping for assets despite depressed prices. The company has just reported that it achieved a record gold production of 767,000 ounces in the fourth quarter.

Goldcorp also stated that it expected to increase gold production by 50% over the next two years. It looks like Goldcorp will continue its plan to deliver organic growth. It is unlikely that the company will need additional funds from the debt markets. Therefore, a possible rating cut will have no immediate impact on Goldcorp.

Newmont Mining has a very relaxed debt schedule. The company has $554 million to pay in 2014, followed by $486 million in 2017.As Newmont Mining had almost $1.5 billion of cash on its balance sheet at the end of the third quarter, it will have no problem dealing with the debt payments.

The only possible scenario when Newmont needs lots of money for capital expenditures is if the company chooses to actively develop its troubled Conga project in Peru. However, the project is unlikely to attract major investments from Newmont if gold prices stay where they are now.

What if gold prices fall below $1,100 per ounce?
Gold miners were actively pursuing cost cuts in 2013, and third quarter results showed that they made significant progress in this endeavor. Barrick's all-in sustaining costs were $916 per ounce, while Newmont's were $993 per ounce and Goldcorp's were $992 per ounce.

It means that major gold miners have some safety cushion in case gold prices fall even lower. The situation is more difficult for companies like IAMGOLD (NYSE: IAG  ) , which finished the third quarter with all-in sustaining costs of $1,216 per ounce. This figure is dangerously close to current gold prices, and the company must demonstrate additional cost-cutting efforts to become attractive for investors.

Bottom line
I do not think that possible credit rating cuts pose a real threat for major gold miners. Gold prices are far more important. Although Barrick, Newmont, and Goldcorp were mostly successful in cost-cutting in 2013, further declines in gold prices will pressure their shares.

Discover our top stock pick for 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2789695, ~/Articles/ArticleHandler.aspx, 8/29/2015 4:58:09 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

Today's Market

updated 19 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
ABX $7.13 Up +0.29 +4.24%
Barrick Gold Corp. CAPS Rating: ***
GG $13.96 Up +0.28 +2.05%
Goldcorp, Inc. (US… CAPS Rating: ***
IAG $1.71 Up +0.14 +8.92%
IAMGOLD Corp (USA) CAPS Rating: ***
NEM $17.17 Up +0.47 +2.81%
Newmont Mining Cor… CAPS Rating: ***