The previous year was a tough one for gold miners like Barrick Gold (NYSE:GOLD) 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.
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.