RATING RATIONALE
"Gold Fields Limited's planned unbundling of its two South African mining assets (Kloof-Driefontein Complex and Beatrix) will initially lead to an overall weaker credit profile after the transaction is concluded, hence the one-notch downgrade to Ba1," says Gianmarco Migliavacca -- Vice President - Senior Analyst and lead analyst for Gold Fields Limited. "The rationale for the downgrade to Ba1 is driven by an overall weaker scale, geographic diversification and liquidity profile. The downgrade also reflects near-term deterioration of cash flow metrics, as the unbundled -- more mature -- assets contributed more positive free cash flow compared to the company's South Deep mining project which is still in a ramp-up phase and is therefore reporting negative free cash flow generation. At the same time, Gold Fields Limited's Ba1 rating takes into account the credit positive aspects of the transaction such as lowering the company's cost base, thus contributing towards more sustainable higher operating margins and reducing exposure to South African mining industry risk factors such as: (1) productivity losses due to labour unrest; and (2) higher-than-inflation wage and electricity price increases" adds Mr Migliavacca.
The negative outlook assigned to Gold Fields Limited's ratings is primarily driven by the near-term deterioration of free cash flow and higher reliance of cash flows from its operations in Ghana in the short to medium term, until the South Deep project is complete and can contribute towards healthy positive free cash flows.
The rating assumes that the current guarantee structure, which, according to management, will include the assets held by Sibanye Gold Limited, will remain in place for the existing $1 billion bond.
Detailed considerations for Gold Fields Limited's Ba1 rating:
REDUCED SCALE IN TERMS OF PRODUCTION, REVENUE AND EBITDA
Following the unbundling of its Kloof-Driefontein Complex and Beatrix assets, Gold Fields Limited's new position will be the seventh largest global gold producer with projected annual production of 2.0 million ounces (currently fourth-largest gold producer). The number of mines it operates will drop to six (from eight currently), and revenues and EBITDA will decrease by approximately 40% and 32%, respectively.
WEAKER GEOGRAPHIC DIVERSITY WITH INCREASED EXPOSURE TO GHANA
As a result of the unbundling, Gold Fields Limited's production profile will be predominantly exposed to Ghana (38% of production), followed by Australia (28%), South Africa (20%) and Peru (14%). The current production profile is South Africa (49% of production), followed by Ghana (24%), Australia (18%) and Peru (9%).
Although Moody's recognises the risks of operating in South Africa, the rating agency views Ghana as a riskier country for Gold Fields Limited's mining operations than South Africa, where there has been a mining charter governing gold mining companies, such as Gold Fields Limited, since 2004 (later amended in 2010).
Moody's recently downgraded South Africa's sovereign rating to Baa1/negative from A3, with the rating agency's view of the institutional strength component having been lowered to "moderate" from "high". However, if Ghana was rated by Moody's, that country's sovereign rating and Moody's assessment of the institutional strength component are likely to be weaker than the rating agency's published assessments for South Africa. Therefore, replacing South Africa's contribution for Ghana, while improving factors such as the overall cost structure of Gold Fields Limited after completion of the transaction, leads to our conclusion that overall geographic diversification will weakens due to the higher perceived political and economic risks in Ghana.
LOWER CASH COSTS EXPECTED TO IMPROVE MARGINS
Gold Fields Limited's unbundled assets, Kloof-Driefontein Complex and Beatrix, are collectively known as "narrow vein assets", while the remaining assets are collectively known as "large ore body assets". The large ore body assets that are predominantly open pit operations (or mechanised underground operations) which also require a relatively smaller labour force, have a lower cost-base than the unbundled narrow vein assets, that are deep-level mining operations which require a significant manual labour force for extraction. Moody's therefore recognises that Gold Fields Limited's cash costs are expected to reduce to $780/oz from $879/oz currently, and its EBITDA margin would improve by around 500 basis points due to the unbundling of its two older South African mines. The rating agency also expects EBITDA margin to improve to 48.4% from 43.5% for the 12 months ended 30 June 2012, according to Moody's standard definitions, adjustments and calculations.
WEAKER SHORT-TERM CASH FLOW GENERATION AND LIQUIDITY PROFILE
Nevertheless, on completion of the transaction, Gold Fields Limited will display weaker initial free cash flow generation, due to the removal of two healthy cash-generative assets. Its remaining mine in South Africa, South Deep, is still in ramp-up phase and thus still reporting negative free cash flow due to its high capital expenditure needs. However, based on current gold price assumptions South Deep is forecast to break-even during 2013.
As a result of the proposed unbundling transaction, Gold Fields Limited would also have a weaker liquidity profile in the near term, as it will lose two of its cash-generative mining assets, whilst retaining the South Deep mine in South Africa will still require higher capital expenditure than the contribution it is making in terms of cash flows. As South Deep builds up to full production, we recognise that its free cash flow contribution could become significantly positive as a result of the ramp-up stage being completed.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the change in the company's geographic mix and more limited scale, upward ratings pressure is currently limited at this stage. The rating outlook, however, could be changed to stable if (1) the higher reliance on Ghana does not prove to materially increase the overall business risk profile of Gold Fields Limited; (2) the completion of the South Deep project remains on track; and (3) the overall group's EBITDA margins prove to sustainably improve due to the unbundling transaction.
Further negative pressure could be exerted on Gold Fields Limited's Ba1 rating as a result of the company's inability to cut costs and projects in a (1) deteriorating gold price environment and/or (2) higher cost environment, thus allowing leverage, as measured by Net Debt /EBITDA, to increase above 2.0 times and cash flow from operations after dividends/debt to fall below 30% on a sustained basis. Negative pressure would also be exerted on the company's rating due to increased liquidity risk or an inability to access cash flows from any of its important international operations (namely Ghana, Australia and Peru).
PRINCIPAL METHODOLOGY
The principal methodology used in rating Gold Fields Limited and Gold Fields Orogen Holding (BVI) Limited was the Global Mining Industry Methodology, published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Johannesburg, South Africa, Gold Fields Limited is a global gold mining company with sales of ZAR49.5 billion (approximately $5.9 billion) and annual attributable production of 3.47 million ounces for the 12 months ended 30 June 2012, making it the fourth-largest producer globally. The group is 100% publicly listed on the Johannesburg, New York, Dubai, Zurich and the Brussels stock exchanges. The group operates eight mines on three continents; three mines in South Africa, two in Ghana, two in Australia and a gold/copper mine in Peru.
The local Market analyst for Gold Fields Limited and Gold Fields Orogen Holding (BVI) Limited is Dion Bate, 27-11-217-5472.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Gold Fields Limited has received a Rating Assessment Service within the last two years preceding the Credit Rating Action.
Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.
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Gianmarco Migliavacca Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 David G. Staples MD - Corporate Finance Corporate Finance Group Telephone: 00971 4237 9536 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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