Moody's upbeat about European, Middle Eastern and African mines' cash position

Cape Town - A recovery in metal prices, deep cost-cutting measures and stricter financial discipline have had a positive effect the balance sheets and cash flows of high-yield miners in Europe, the Middle East and Africa (EMEA), says Moody's Investors Service in a report.

The stronger balance sheets have in turn bolstered their liquidity levels in the first quarter of 2017 compared to the same period in 2016.

In the report, Moody’s looked at the liquidity position of 16 rated mining companies across the EMEA region.

"Almost all EMEA high-yield miners now have adequate to strong liquidity, which is very much in contrast with the past two years when 20% of all rated miners in the region were weak in liquidity terms," says Gianmarco Migliavacca, senior credit officer at Moody's.

The report shows that high-yield miners have further mitigated refinancing risk by pushing a large amount of 2017-18 maturities to 2019 and beyond.

READ: Light at the end of mining tunnel with increased profits 

Moody’s however singled out AngloGold Ashanti as the only mining company of which the liquidity position was revised downwards – from strong to good.

"[This is] primarily due to higher than anticipated global capital expenditures and elevated operating costs in South Africa," says Douglas Rowlings, analyst at Moody's.

AngloGold Ashanti last week announced that it will restructure its operations in South Africa which may result in the retrenchment of some 8 500 workers. The mining company has warned that it would review its South African gold mining operations in the light of losses incurred. It said some of the older mines have reached the end of their economic lives, several decades after they started production.

READ: AngloGold profit drops after SA cost blowout 

South African mining companies, including AngloGold Ashanti, have recently suffered substantial losses which saw R51bn wiped off their combined value when Mineral Resources Minister Mosebenzi Zwane announced a new Mining Charter with onerous empowerment criteria.

Analysts fear that the new provisions could put  further pressure on South African miners’ profit margins, deter merger and acquisitions and stifle further investment in the industry, which shed some 70 000 jobs in the past five years.

Moody’s warned in a statement issued shortly after the Charter announcement that the Charter is harmful to the South African economy.

READ: Rand jumps as Moody's warns SA about Mining Charter 

The ratings agency however believed that the ANC is likely to ask for it to be withdrawn, in addition to the Chamber of Mines’ court bid to halt its implementation.

In its mining report, Moody’s was upbeat about other high-yield miners’ ability to reduce their reliance on banking facility drawdown in 2017 compared to the previous year.

“Average use of committed revolving credit facilities fell to 28% in March 2017, a level close to 2013 pre-crisis levels (when commodity prices dived), as performance improvements and stronger cash balances reduced the need for such facilities.”

Cash balances and available bank facilities remain the key liquidity sources for EMEA miners in 2017, but positive free cash flow is back as additional projected source of liquidity. Return to positive free cash flow and the doubling of average availability under revolving credit facilities among high-yield miners are two major liquidity improvements compared to last year.

Moody's expects a rebound in mining companies’ capital expenditure (capex) in 2017 as a result of cost-cutting measures in 2016, and some resumption in dividends as excess cash is built-up. Most of the largest rated EMEA miners will maintain the disciplined financial policy already factored into their ratings.

However, more aggressive dividend or capex plans would lead Moody's to reconsider its financial policy assessments of the mining companies.