The number of mining companies landing in the junk bin is getting bigger.
Kinross Gold Corp. became the latest miner to have its credit rating cut to junk after Standard & Poor's on Thursday lowered its rating to BB+ from BBB-. The agency earlier the same day lowered Anglo American PLC to below investment grade, following similar cuts by Moody's Investors Service and Fitch Ratings this week. Freeport-McMoRan Inc. was cut to junk by S&P last week, less than a month after Moody's did the same.
While mining shares are benefiting from gains this year, they're recovering from multi-year lows. Even though metals prices have rebounded, they're still trading close to their cost of production, eroding profit margins. As companies struggle to stem global gluts by curtailing output, some are also selling assets to generate cash and pay down debt. By contrast, Kinross in November said it would spend $610-million (U.S.) to buy assets in Nevada from Barrick Gold Corp., joining rival Newmont Mining Corp. in a bid to ramp up output as its method of combating falling metal prices.
"The stable outlook on Kinross reflects our view that the company will maintain an intermediate financial risk profile over the next 12 months," the ratings agency said in a statement. "We expect the company's competitive position to remain weaker than its investment-grade peers over the next two years, which primarily reflects Kinross' comparatively higher cost structure."
Kinross shares climbed 8.1 per cent in Toronto to $4.15 (Canadian), as other bullion producers climbed. The shares are up 20 per cent over the past year.
"We believe Kinross is in a strong financial position, and note that we have met our cost guidance for the past four years," Louie Diaz, a Kinross spokesman, said in an e-mail. "In 2015, we achieved the lowest cost of sales since 2011 and we expect to lower our all-in sustaining cost in 2016. We have also made prudent cost assumptions for FX and oil and expect to benefit should current levels remain or weaken further." The operations acquired in Nevada will also help to increase cash flow, he said.
S&P also cited Kinross operations in Russia as a reason for the downgrade. The company is "highly reliant" on production from mines in the country, "which contribute to operating risk exposure that we no longer consider commensurate with a 'BBB-' rating," the agency said.
Goldman Sachs Group Inc. last week said that the recent rebound for mining shares wasn't justified. Commodity analysts at the bank said they expect copper and aluminum prices will fall more than 10 per cent by year's end amid weakness in Chinese demand. Analysts including Jeffrey Currie and Max Layton on Feb. 15 said it's time to bet against gold prices. The Bloomberg Commodity Index, which measures returns for 22 components, has slumped 27 per cent over the past year and in January reached a record low.