TORONTO — Gold miners’ appetite for capital spending is likely to increase in 2017 as higher gold prices allow companies to start investing in their businesses again, said Moody’s Investors Service in a new report. As a result, the rate at which they develop projects and how those projects are funded will be key credit considerations next year.
The average spot gold price through end of October 2016 was $1,273 per ounce, 10% higher than the average price of $1,160 in 2015. As gold miners’ profitability is strongly tied to the gold price, this has resulted in the industry generating significantly stronger cash flows and earnings, boosting their credit quality.
In addition to stronger prices, many companies also benefitted in 2016 from lower operating costs after focusing on cost cutting during a three-year slump in gold prices. As gold is priced in US dollars, a stronger dollar has benefited miners based outside of the US.
However, while the industry is generating significantly stronger cash flow, a trend that Moody’s expects to continue next year, higher gold prices alone will not result in ratings upgrades.
“How companies use their funds will be a very important factor in the ratings assessment,” said Jamie Koutsoukis a Vice President and Senior
Analyst at Moody’s. “Although near-term spending on large projects could result in negative cash flow, future production growth would likely have a positive effect on the rating.”
Spending will likely focus on extending existing operations and phased development, rather than large-scale greenfield projects.
Gold pared a third weekly drop as the dollar halted a rally that sent bullion prices to a nine-month low and pushed silver into a bear market.
Bullion’s first gain in four days cut the week’s loss to 2%. Prices have tumbled as strong economic data and the prospect of more spending after Donald Trump’s US election win boosted bets for higher interest rates.
Investors are selling out of gold-backed funds at the fastest pace in three years.
The metal rebounded on Friday as the Bloomberg Dollar Spot Index retreated from a recent high. Gold’s decline earlier stalled at $1,171.18 an ounce, which is near a 61.8% retracement of the rally from December to July. The Fibonacci figure is used by some traders and analysts to determine support levels.
“There’s a good argument to be made that this is a calm before the storm,” Anthem Blanchard, CEO of Anthem Vault in Austin, Texas, said in a phone interview. “There’s probably going to be a lower-than-expected rate increase, or maybe it will be the same as last year.
Those are some real catalysts for gold prices in dollar terms.” — SG
