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Cape Town - Brexit will benefit free cash flow for AngloGold Ashanti and Gold Fields, Moody's said on Monday.
Douglas Rowlings, asistant vice-president analyst at Moody’s, said the depreciation of commodity currencies like the rand and the Australian dollar is credit positive for gold miners AngloGold Ashanti [JSE:ANG] (Baa3 stable) and Gold Fields [JSE:GFI] (Ba1 stable).
He said their free cash flow will increase with lower operating costs for their Australian and South African mines in US dollar terms, along with a higher US dollar gold price increasing revenues.
Britain's surprise decision to leave the European Union wiped $2.1trn off market valuations on Friday and sent the pound collapsing to a 31-year low against the dollar.
An investor flight to safety saw gold rallying 8.5% to a two-year high of $1 358 per ounce within a few hours of voting stations closing – gold’s biggest rally since the global financial crisis of 2008.
At the same time, the US dollar strengthened as investors bought US treasuries, driving a 4% depreciation of the Australian dollar (AUD) and a 9% depreciation of the South African rand (ZAR) relative to the US dollar.
Rowlings said as a result of Brexit, AngloGold Ashanti could generate an additional $120m in free cash flow in the second half of 2016, while Gold Fields could add an additional $50m in free cash flow. This is based on a gold price of $1 300/oz and exchange rates of AUD1.35/$ and R15/$.
"At a $1 200 per ounce gold price, and slightly weaker exchange rates of AUD1.40 per US dollar and ZAR16 per US dollar, we forecast second-half 2016 free cash flow generation of around $185m for AngloGold Ashanti and $135m for Gold Fields."
AngloGold Ashanti derives around 14% of its gold production from Australia and 26% from South Africa, while Gold Fields derives 43% of its output from Australia and 10% from South Africa.
Gold Fields and AngloGold Ashanti gained 2.36% and 2.24% respectively by 11:00 on Monday. The other counters in the Gold Mining Index - Harmony Gold and DRDGold - also gained, adding 2.9% and 3.7% respectively.
Rowlings said the next few months will likely be bumpy for the gold and currency markets as Brexit effects materialise.
"AngloGold Ashanti’s and Gold Fields’ credit profiles remain well positioned to accommodate any volatility over this period given their deep liquidity sources and strong credit metrics," Rowlings said.
The contagion-related uncertainty that Brexit brings to the global economy is likely to continue to support demand for safe haven asset classes, keeping gold prices high and the US dollar strong relative to the AUD and ZAR as investors buy US treasuries.
Moody’s said its conservative view on gold prices ($1 200/oz) builds in cushioning for downside price volatility and the stability of its ratings through normal price cycles. “Consequently, we would not consider credit metrics forecast at a $1 300/oz gold price.”
