S&P Lifts Outlook on IAMGOLD Corp. (IAG) to Positive; Ratings Affirmed
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S&P Global Ratings today said it revised its outlook on IAMGOLD Corp. (NYSE: IAG) to positive from stable. At the same time, S&P Global Ratings affirmed its 'B' long-term corporate credit rating and 'B+' issue-level rating on the company's unsecured notes. The '2' recovery rating on the company's unsecured notes is unchanged and reflects our view of substantial (70%-90%; high end of the range) recovery in a simulated default scenario, and an issue-level rating that is one notch above the long-term corporate credit rating.
"The outlook revision follows the upward revision to our gold price assumptions, and also takes into account IAMGOLD's more than US$200 million in debt reduction this year and continuing strong cash position," said S&P Global Ratings credit analyst Jarrett Bilous.
We estimate the company will generate credit measures that we consider strong for the current rating over the next two years, including adjusted debt-to-EBITDA of about 3x. Our rating also takes into account the high sensitivity of IAMGOLD's credit ratios to modest changes in prices based on its current cost structure. In addition, we believe the company could face heightened free cash flow deficits over the next two years if growth-related expenditures accelerate which, in our view, adds a degree of financial risk. However, in the event gold prices remain generally in line with our expectations into 2017, with relatively stable cash costs generated by IAMGOLD, we believe there is an increased likelihood for a one-notch upgrade.
We consider IAMGOLD's financial risk profile as highly leveraged, but view its prospective credit measures as strong for this assessment. Based primarily on the increase in our gold price assumptions (for more information see "S&P Global Ratings Revises Its Price Assumptions For Iron Ore, Gold, Zinc, And Aluminum," published Aug. 26, 2016, on RatingsDirect), we expect the company to generate earnings and cash flow well above our previous expectations. In addition, IAMGOLD has meaningfully reduced debt outstanding by tendering about US$146 million in aggregate principal of its 2020 notes this month following its recent US$230 million bought deal equity financing. We now estimate it will generate an adjusted debt-to-EBITDA ratio of about 3x and FFO-to-debt of over 20% in the next few years, commensurate with an improved financial risk profile and much stronger than our previous estimates.
We base our vulnerable business risk assessment primarily on IAMGOLD's limited operating diversity, operations in relatively higher-risk jurisdictions, and higher cost structure relative to that of its rated peer group. The company relies heavily on its Essakane (Burkina Faso) and Rosebel (Suriname) mines for the vast majority of production and earnings. Output from IAMGOLD's Westwood (Quebec) mine helps to diversify the company's sources of gold production and should gradually increase to full throughput over the next three years, but the mine is currently a modest contributor to output (and currently a high-cost operation).
The positive outlook primarily reflects the upward revision to our gold price assumptions that, in tandem with recent debt repayments by IAMGOLD, should lead to a material improvement in the company's core credit ratios through 2017. We estimate IAMGOLD will generate a sustained adjusted debt-to-EBITDA ratio of about 3x over this period, which is strong for the rating.
We could upgrade the company if we believe it will sustain an adjusted debt-to-EBITDA ratio of about 3x through 2017. In this scenario, we would expect average gold prices and estimated cash costs roughly in line with our assumptions for this period, with continued strong liquidity.
We could revise the outlook to stable if we expect IAMGOLD will generate earnings and cash flow below our expectations leading to adjusted debt-to-EBITDA ratio of about 4x. In this scenario, we would expect the company to realize gold prices below our current assumptions or generate cash costs above our estimates, without any change in our view of its strong liquidity assessment.
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