Fitch Ratings has rated Kinross Gold Corporation's (Kinross; NYSE: KGC, TSE: K) $1 billion, three-year senior unsecured term loan at 'BBB-'. A complete list of ratings follows this release.
The Rating Outlook is Stable.
Kinross' ratings reflect its sizable reserves, average cost position and average geopolitical risk position, as well as plans for substantial development spending over the medium term along with Kinross' commitment to maintain a conservative capital structure given its exposure to gold prices. In weak gold markets, the company has the ability to defer development and exploration and focus on cash preservation.
Pro forma for the closing of the term loan and increase of the revolving credit facility, liquidity at June 30, 2012 was strong, with cash on hand of $2.3 billion and $1.5 billion available, after $42.8 million in letters of credit, under the company's $1.5 billion revolver now due August 2017. Financial covenants under the facilities are expected to be comparable to the prior facility, which included a maximum net leverage of 3.5x and minimum tangible net worth of $5.25 billion plus 50% of positive net income for each fiscal quarter from and including the fiscal quarter ending March 31, 2011. The latest 12 months ended June 30, 2012 operating EBITDA was $2.1 billion and pro forma Debt/EBITDA was 1.3.
Liquidity should remain adequate to support Kinross' large growth capital spends which are expected to be $1 billion to $1.5 billion annually over the next two to three years. Management is currently engaged in a capital optimization program which may result in lower overall spending. With capital expenditures expected to be $2.2 billion in 2012 and given the growth capital spending expected in 2013, Fitch expects Kinross to be free cash flow negative in the amount of $1.5 billion on average in each of 2012 and 2013 depending on gold prices and the timing of spending. Fitch expects Kinross to remain in compliance with its covenants and have sufficient liquidity to support its capital projects. Going forward, operations are expected to return to positive free cash flow once the Tasiast project in Mauritania is complete.
Kinross' earnings are sensitive to gold prices; for 2012 a 10% decline in gold prices from 2011's average of $1,502/oz could result in a $370 million decline in pre-tax earnings. Costs are sensitive to exchange rates; a 10% change in foreign exchange could result in a $5/ounce impact in production cost of sales.
The Stable Outlook reflects Fitch's expectation that total debt/EBITDA will not exceed 2x when borrowing is at its peak. Should internal cash generation fall behind expectations, Fitch expects expenditures to be cut or to be supported by new equity issuance or asset sales.
WHAT COULD TRIGGER A RATING ACTION
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Gold prices and internally generated cash flow deteriorate without an equal management response in the form of reduced spending, cut dividends, asset sales or the raising of equity;
--Expectations that total debt/operating EBITDA will be greater than 3x.
Positive: Not anticipated given capital spending plans but future developments that may lead to a positive rating action include:
--Modest net borrowing and free cash flow positive on average.
Fitch has the following ratings on Kinross:
--Issue Default Rating 'BBB-';
--Revolving Credit Facility 'BBB-';
--Senior unsecured convertible notes due March 15, 2028 'BBB-';
--$250 million Senior unsecured notes due 2016 'BBB-';
--$500 million Senior unsecured notes due 2021 'BBB-';
--$250 million Senior unsecured notes due 2041 'BBB-'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Monica M. Bonar, +1-212-908-0579
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Christopher M. Collins, CFA, +1-312-368-3196
Sean T. Sexton, CFA, +1-312-368-3130
Brian Bertsch, New York, +1-212-908-0549