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Global Credit Research - 08 Jan 2014
Toronto, January 08, 2014 -- Moody's Investors Service has reduced its forward view for the average
price of gold and silver in 2014 and beyond to $1,100/oz
and $18/oz, respectively, in its assessment of global
gold and silver producers. The rating agency had previously assumed
the price of gold and silver would average $1,200/oz and
$20/oz over the next couple of years.
These lower price expectations reflect significant deterioration in the
spot price of gold and silver to about $1,200/oz and $20/oz,
respectively, and fundamentals that seem unfavorable over the next
couple of years as the global economy maintains forward momentum,
governments unwind various stimulus programs, and the threat of
inflation remains subdued in most major economies. Moody's
had previously indicated that it could lower its forward view if the price
of gold was to persist below $1,300/oz.
This forward price view will be used as a baseline approximation when
analyzing the credit condition of gold and silver producers. Moody's
will be using a downside gold price of $900/oz (revised from $1,000/oz)
as part of its assessment of gold producers' fundamental credit
ratios and the expected adequacy of liquidity under a stress scenario.
Moody's has similarly lowered its downside view for the price of
silver to $15/oz (revised from $17/oz).
The increasing risk of lower prices suggests that key credit metrics of
certain producers are stretched for current ratings in the absence of
mitigation through cost reductions or other actions. Moody's
will evaluate the impact of lower prices for each company individually
over the coming months. Moody's expects that fourth quarter
2013 reporting and additional discussions with management will provide
more insights into the ability and willingness of producers to lower their
overall costs in response to market price deterioration. However,
this does not preclude earlier rating actions for issuers that are weakly
positioned in their ratings or where Moody's has concerns about
a company's liquidity.
Operating costs for gold producers increased significantly over the past
several years as mining companies chased new production in response to
rising prices. Costs rose, in part, as producers mined
lower-grade ore (which is economic to mine at higher prices),
but producers also saw significant increases in other key cost inputs,
including wages, power, consumables, exploration,
environmental spending requirements and government royalties. Including
sustaining capital expenditure requirements, Moody's believes
the rated-industry's all-in average cost of gold production
is currently at least $1,100/oz comprised of about $850/oz
of cash operating costs and a minimum of $250/oz of sustaining
Precious metal producers have been implementing significant opex and capex
cost reductions in response to lower prices. They are focusing
their operations on higher-grade ore, idling higher-cost
mines, reducing the number of workers and corporate overhead,
scaling back exploration spending, and postponing or slowing growth
projects. While the industry's retreat from growth will inevitably
cause production to fall, it will also yield benefits, such
as making equipment less expensive and consumables more readily available.
In addition, US dollar appreciation against currencies in major
gold producing countries has been benefiting local production costs while
the sale of non-core assets or other capital raising events could
give a boost to the liquidity of certain producers.
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Darren M. Kirk
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Toronto, ON M5J 1S9
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Lowers Forward View of Gold and Silver Prices
Moody's Canada Inc.
70 York Street
Toronto, ON M5J 1S9
No Related Data.
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