Gold’s weakening outlook threatens miners’ credit ratings – by Rachelle Younglai (Globe and Mail – January 9, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

Moody’s Investors Service cut its gold price forecast for the year, putting the credit ratings of Canada’s largest precious metal producers at risk of a downgrade as they battle an industry slump.

Reflecting the sharp drop in gold prices, Moody’s on Wednesday said it will use an average bullion price of $1,100 (U.S.) an ounce instead of $1,200 to determine a company’s credit rating.

“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 said in a report announcing the lower gold price outlook.

Last year, gold fell nearly 30 per cent to $1,200 an ounce and has traded close to that level for the past few months. The weaker price forced producers to write down assets, cut jobs, and suspend dividends and projects.

A credit downgrade would put companies in a more precarious financial position and make it more expensive for miners to borrow funds.

It’s the latest threat to an industry still suffering the fallout from an ill-timed spree of high-priced acquisitions and expensive mine developments in recent years. Now, gold companies are far less profitable or losing money, and the weaker gold price puts some of their unmined reserves at risk.

“The next story is the writedowns of reserves because of the low gold price,” said John Ing, president of Maison Placements Canada.

“It won’t only be the gold price that will fall, but their expensive reserves and resources,” Mr. Ing said.

Gold companies’ current reserves were calculated using higher prices, when gold was on the rise.

For example, Barrick Gold Corp., the world’s biggest producer, used $1,500 to calculate its reserves. The company has said a $300 drop in its gold price assumption would result in a less than 10 per cent decline in its proven and probable gold reserves (if all other assumptions and inputs remained the same).

The world’s second largest producer, U.S.-based Newmont Mining Corp., used $1,400 to calculate its reserves. Mid-tier Canadian producer Agnico Eagle Mines Ltd. used a $1,490 price assumption for its mines that have a shorter life and $1,345 for its longer-life mines.

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