Dip below $1,000/oz could see gold miners cut dividends - Fitch
Gold mining company writedowns are manageable for now, advises Fitch Ratings, but cautions that a prolonged dip below $1,000 could lead to dividend cuts.
Posted: Wednesday , 26 Jun 2013
RENO (MINEWEB) -
Recent writedowns in the gold mining sector are a non-cash, non-credit event, said Fitch Ratings, as “companies have already announced changes to capital expenditure plans and/or operations associated with the gold in gold prices and lower valuation multiples in the sector.”
Nevertheless, in an article published Tuesday, Fitch cautioned that lower gold prices “may cause some companies to write down the value of their assets when they report annual results.”
“In particular, many companies valued their gold reserves at prices at or higher than $1,300 per ounce at last assessment, which compares with today’s London A.M. gold fixing of $1,285,” said Fitch.
See also: Gold price nearing the cusp
“Since 2011, the industry has seen sizeable writedowns of goodwill following a significant drop in the valuation of mining companies. This is somewhat related to slower demand growth assumptions, attendant lower price expectations, ballooning development costs and operating cost inflation,” Fitch observed. “Assets acquired at peak valuations are especially vulnerable to write-downs.”
In their analysis, Fitch noted that investment grade gold mining companies tend to have debt covenants that have significant headroom. As a result, Fitch suggests that “non-cash write-offs are unlikely to constrain the liquidity of North American investment-grade related rated gold names.”
Nonetheless, a potential dip below $1,000 per ounce in gold price could result in dividend cuts, Fitch cautioned, adding, “We have already seen cuts to capital budgets and an increasing focus on costs.”
Meanwhile, Fitch observed, “While companies may look to shed assets, capital rising has been difficult for small-to-midsized companies,” advising that increased royalty sales, forward sales and gold price hedging may occur for less well capitalized companies.