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Although Goldcorp outlook stable, S&P worries about asset diversity

Goldcorp's financial strengths are offset by its metals prices exposure, its reliance on several key assets, and large capex plans, says Standard & Poor's.

Author: Dorothy Kosich
Posted: Tuesday , 02 Jun 2009

RENO, NV -

Standard & Poor's assigned Goldcorp a ‘BBB+' corporate credit rating with a stable outlook in the wake of Goldcorp's decision to issue $750 million of convertible senior notes in a private offering.

In a note published Monday, S&P Credit Analyst Donald Marleau wrote, "The rating reflects what we view as the strong cost profile and relatively low political risks of Goldcorp's gold mines, supported by the company's modest use of debt."

However, Marleau added, "These strengths are offset in our opinion by the company's exposure to volatile metals prices; its heavy reliance on several key assets; and large, growth-oriented capital expenditure plans."

When Goldcorp announced the US$750 million senior convertible notes offering Monday, the company said it will use $330 million from the net proceeds to repay debt under its revolving term credit facility, with the balance to be used for "general corporate purposes, including capital expenditures."

S&P noted Goldcorp has increased its revenue almost tenfold to US$2.4 billion in the past five years, "quickly repaying any acquisition debt, resulting in what we consider a modest financial risk profile. "

"Goldcorp has the lowest cash costs among its peers, which we consider a critical rating favor for a gold mining company," Marleau said. "That said, this strong cost profile depends heavily on two mines, which accounted for more than two-thirds of Goldcorp's 2008 operating income."

S&P suggests that the Alumbrera mine in Argentina will have a considerably weaker profitability due to lower copper prices for its significant copper by-products. The credit agency is also concerned about the dominance of the flagship Red Lake mine in Goldcorp earnings, accounting for about 25% of the company's total output.

"The company's profitability belies its asset concentration," Marleau said, "because high gold prices support strong cash flows across its entire portfolio of mines. That said, we believe that Goldcorp will gradually reduce this asset concentration, as new mines like Marlin and Peñasquito increase their share of low-cost output because of the relatively high operating risk inherent in the mining industry."

S&P believes the size of the Peñasquito project and its silver, zinc and lead byproducts "will more than offset the higher cash costs and declining output of as it approaches the end of its mine life in 2015."

Nevertheless, Marleau advises Peñasquito "is entering a phase of elevated operating risk, needing to attain several commissioning milestones before it achieves full production in early 2011." He also expressed some concern about Goldcorp's ability to stage its share of the US$2.7 billion Pueblo Viejo joint venture with Barrick in the Dominican Republic.

Meanwhile, Goldcorp has two substantial long-term growth opportunities in its Elénore project and Cochenour project, both in Canada. However, S&P states, "We believe that the continuation of large growth capital expenditures could contribute to a period of negative free cash flow, although the company's proposed convertible senior notes should enable it to preserve its target of about US$1 billion of available liquidity through this period of heavy capital expenditures."

Nevertheless, Marleau stressed, " Goldcorp has exceptional liquidity for the rates, with US$260 million of cash at March 31, 2009, that will be supplemented with the proceeds from the company's announced convertible notes issue, as well as nearly full availability under its US$1.5 billion committed credit facility that matures in 2012."

"We believe the combination of these liquid resources and strong operating cash flow should be adequate to fund capital expenditures in the next 12 months. In our view, the company's strong liquidity is further supported by the fact that Goldcorp has no significant near-term maturities."

S&P says its stable outlook rating reflects the agency's view that "Goldcorp will generate strong credit statistics, but likely be modestly free cash flow negative through 2010 because of elevated capital expenditures."

However, the agency cautioned, its ratings outlook "could be pressured if the company's large capital expenditure program coincides with an unexpected decline in gold and base metals, contributing to debt leverage that exceeds 2x or EDBITDA interest coverage of below 10x."

"Furthermore, Goldcorp's reliance on Red Lake and eventually Penasquito-particularly as the life and profitability of Alumbrera wane-makes the ratings sensitive to disruptions at those key mines," Marleau said.

"Hence, the rating is likely constrained to the ‘BBB' category because of the limited diversity associated with its asset base, as well as Goldcorp's exposure to volatile metals prices," he concluded.