Moody’s downgrades Goldcorp’s ratings to a fraction above ‘junk’, outlook negative

TORONTO (miningweekly.com) – Debt ratings agency Moody’s Investors Service on Friday downgraded the senior unsecured ratings of miner Goldcorp, the largest gold miner by market capitalisation, to one notch above ‘junk’, saying the rating outlook was negative.

The agency cited poor profitability and coverage, production declines, execution challenges at several mines and the recently announced senior management changes as the basis for its action.

"The downgrade of Goldcorp's rating reflects the deterioration of its profitability and coverage metrics and our expectation they will remain weak through 2016, combined with minimal free cash flow generation at a $1 100/oz gold price," explained Moody's VP and senior analyst Jamie Koutsoukis.

The lowest rating under Moody's long-term ‘investment grade’ corporate obligation rating, Baa3, meant that Goldcorp’s obligations were subject to moderate credit risk.

Moody’s said that, despite recently completed gold mine developments, Vancouver-based Goldcorp saw a deterioration in coverage and profitability in 2015 as a result of lower commodity prices, with an adjusted earnings before interest and tax (Ebit) margin of negative 2% and Ebit/interest expense of -0.5x in 2015.

The company guided for a lower output of 2.8-million ounces to 3.1-million ounces from 2016 to 2018, down from about 3.5-million ounces in 2015, driven by production declines at older mines such as Peñasquito, in Mexico – which will fall to 550 000 oz this year, from 880 000 oz oz in 2015 due to ore grades – folding and recovery issues at the new Éléonore mine, in Canada, and deferred construction of its Cochenour mine, in Canada’s Red Lake district.

Further, free cash flow would only marginally improve in 2016 and 2017, at an average gold price of $1 100/oz, even with lower expected capital expenditures over the next two years.

Offsetting some of these pressures were Goldcorp's low leverage, as the expected adjusted debt/Ebit would be 2x at the end of 2016, excluding capitalised stripping costs, a continuing focus on cost reduction from both operating and exploration perspectives, and a reduced dividend.

However, Moody’s noted that recent executive management changes had heightened the risk the company could deviate from its conservative financial policies.

“The negative outlook incorporates our expectation that Goldcorp will be challenged to improve its profitability and coverage metrics given the expectation of reduced performance from its mines and the risk that lower prices could result in negative free cash flow,” said Moody’s.

Moody’s advised that ratings could be downgraded should operating challenges or gold price deterioration result in continued poor Ebit margins, with cash flow consumption, combined with increasing leverage towards the upper 2x range. Conversely, Goldcorp's ratings could be upgraded if Ebit returns improved materially, leverage remained low and liquidity remained strong.

Meanwhile, Moody’s had confirmed three other major miners’ ratings. Newmont Mining’s debt ratings were left intact at Baa2, outlook stable, while Barrick Gold’s debt ratings were confirmed at Baa3, outlook negative. AngloGold Ashanti’s long-term issuer rating and senior unsecured ratings were also confirmed at Baa3, outlook stable.

Moody's also on Friday downgraded the long-term senior unsecured ratings for Chile's State-owned copper miner Codelco, from Baa1 to A3, with the outlook remaining negative. Moody's said it based the action on "the impact of the volatility and downward pressure of copper prices in Codelco's credit metrics, lower earnings expectations and the large expansion phase with substantial capital expenditures needed to increase production and reverse the declining trend in ore grades".