Moody's Investors Service has reduced its forward view for the average price of gold and silver in 2014 and beyond to $1,100/oz and $18/oz, respectively, in its assessment of global gold and silver producers. The rating agency had previously assumed the price of gold and silver would average $1,200/oz and $20/oz over the next couple of years.
These lower price expectations reflect significant deterioration in the spot price of gold and silver to about $1,200/oz and $20/oz, respectively, and fundamentals that seem unfavorable over the next couple of years as the global economy maintains forward momentum, governments unwind various stimulus programs, and the threat of inflation remains subdued in most major economies. Moody's had previously indicated that it could lower its forward view if the price of gold was to persist below $1,300/oz.
This forward price view will be used as a baseline approximation when analyzing the credit condition of gold and silver producers. Moody's will be using a downside gold price of $900/oz (revised from $1,000/oz) as part of its assessment of gold producers' fundamental credit ratios and the expected adequacy of liquidity under a stress scenario. Moody's has similarly lowered its downside view for the price of silver to $15/oz (revised from $17/oz).
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 will evaluate the impact of lower prices for each company individually over the coming months. Moody's expects that fourth quarter 2013 reporting and additional discussions with management will provide more insights into the ability and willingness of producers to lower their overall costs in response to market price deterioration. However, this does not preclude earlier rating actions for issuers that are weakly positioned in their ratings or where Moody's has concerns about a company's liquidity.
Operating costs for gold producers increased significantly over the past several years as mining companies chased new production in response to rising prices. Costs rose, in part, as producers mined lower-grade ore (which is economic to mine at higher prices), but producers also saw significant increases in other key cost inputs, including wages, power, consumables, exploration, environmental spending requirements and government royalties. Including sustaining capital expenditure requirements, Moody's believes the rated-industry's all-in average cost of gold production is currently at least $1,100/oz comprised of about $850/oz of cash operating costs and a minimum of $250/oz of sustaining capital costs.
Precious metal producers have been implementing significant opex and capex cost reductions in response to lower prices. They are focusing their operations on higher-grade ore, idling higher-cost mines, reducing the number of workers and corporate overhead, scaling back exploration spending, and postponing or slowing growth projects. While the industry's retreat from growth will inevitably cause production to fall, it will also yield benefits, such as making equipment less expensive and consumables more readily available. In addition, US dollar appreciation against currencies in major gold producing countries has been benefiting local production costs while the sale of non-core assets or other capital raising events could give a boost to the liquidity of certain producers.