Dec. 18 (Bloomberg) — Plans by Gold Fields (JSE:GFI) Ltd. and AngloGold Ashanti (JSE:ANG) Ltd. to reduce exposure to South Africa produced different outcomes for investors, as the former got cut to junk, while the other was affirmed at investment grade.
Gold Fields, the nation’s second-largest producer of the metal, said Nov. 29 it will spin off all but one of its South African assets. While the shares gained 5.7 percent on the day, Moody’s Investors Service downgraded the company to its top non- investment-grade rating Dec. 6, and gave it a negative outlook. AngloGold, the third-largest gold miner, was affirmed at BBB- by Standard & Poor’s Dec. 10 with its plan to reduce local output to 30 percent of total production from 37 percent.
The spread between the yield on Gold Fields’ dollar- denominated bonds maturing in October 2020 and AngloGold’s securities due in August 2022 has widened 37 basis points since Oct. 29, when AngloGold traded at a premium. Gold Fields’ yields climbed 30 basis points over the period, while AngloGold’s rates fell 13 basis points. That compares with an 11 basis-point drop in the average spread for emerging-market mining companies, JPMorgan Chase & Co. indexes show.
Gold Fields aimed to curb the risks identified by ratings companies and was instead hit by a downgrade executives “thought they were not going to get,” Percy Takunda, an analyst at Imara SP Reid Ltd., said by phone from Johannesburg on Dec. 14. It will “need some capital” for a South African operation it decided to retain, he said.
The Johannesburg-based company is keeping South Deep, a mine under development 45 kilometers (28 miles) southwest of the city. Gold Fields’ credit profile will weaken as South Deep boosts production to 700,000 ounces a year by 2016 and it is left without the cash-generating mines it spun off, Moody’s said. The proportion of South African output will then decline to 28 percent from 47 percent, the company said.
AngloGold said on Nov. 8 it will reduce spending by $200 million this financial year, focusing on drawing fewer, higher- quality ounces from its South African mines and reviewing the timing of projects, including one in Mali and another in the Democratic Republic of Congo.
“The affirmation reflects our view of AngloGold’s strategy to diversify its geographic footprint and increase production,” S&P said in a statement. “We continue to assess AngloGold’s business risk profile as satisfactory, notwithstanding increased country risk in South Africa.”
Gold Fields expected the downgrade “as we had commissioned Moody’s and they had indicated their intentions,” Sven Lunsche, a spokesman for the company, said in an e-mailed response to questions. Lunsche said that debt funding won’t be needed for Gold Fields’ key mine starting in 2013.
“We expect South Deep to be self-funding from next year onwards as it builds up production,” he said.
AngloGold didn’t rule out a sale of local assets. “We regularly review our strategy and structure to make sure that we are on the right commercial path and will continue to explore all options, as normal course of business,” company spokesman Alan Fine said.
Both companies were forced to close their local mines in October, while platinum operations owned by Anglo American plc (JSE:AGL)Plc and Lonmin plc (JSE:LON)Plc were crippled by strikes that started in August. The country’s gold output plunged by 46 percent in October from a year earlier, according to Statistics South Africa. even as mines agreed to pay increases of 11 percent to 22 percent.
The unrest will probably cost the economy about half a percentage point of growth, National Treasury Director General Lungisa Fuzile said Oct. 26. The government is forecasting 2.5 percent expansion this year, the least since a 2009 recession.
The yield on the South African government’s 6.75 percent bonds due March 2021 fell 4 basis points, or 0.04 percentage point, to 6.45 percent at 2:45 p.m. in Johannesburg, after climbing to as high as 7 percent in October. The premium investors demand to hold the debt rather than U.S. Treasuries narrowed 11 basis points to 466. The rand weakened 0.2 percent to 8.5554 per dollar by 2:46 p.m. in Johannesburg, extending its decline this year to 5.5 percent.
Gold Fields’ South African production will initially fall to 13 percent before rising as production from South Deep increases, the company said.
The company’s plan has some “credit positive” effects 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,” Moody’s said.
Jason Lightfoot, who helps manage the equivalent of $12.6 billion of fixed-income funds at Cape Town-based Futuregrowth Asset Management is maintaining a buy rating for the company’s shares, though he is more cautious on its bonds.
“From a debt point of view you’d rather let things bed down for a while before you climb in,” he said.