S&P Lifts Outlook on Yamana Gold (AUY) to Stable; Ratings Reaffirmed
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S&P Global Ratings today said it revised its outlook on Yamana Gold Inc. (NYSE: AUY) to stable from negative.
At the same time, S&P Global Ratings affirmed its 'BB+' long-term corporate credit and senior unsecured debt ratings on Yamana. The '3' recovery rating on the debt, which corresponds with what we consider meaningful (50%-70%; at the high end of the range) recovery in default, is unchanged.
"The outlook revision primarily reflects the improved prospects for Yamana's earnings and cash flow generation following higher year-to-date gold prices and the upward revision to our price assumptions through 2018," said S&P Global Ratings credit analyst Jarrett Bilous. (See "S&P Global Ratings Revises Its Price Assumptions For Iron Ore, Gold, Zinc, And Aluminum," published Aug. 26, 2016, on RatingsDirect.)
In addition, we expect the company will generate higher free cash flow that, combined with proceeds from asset sales, will enable it to achieve its US$300 million debt reduction target by the end of 2017.
Our view of Yamana's business risk profile as fair primarily reflects the company's relatively low-cost production profile and comparatively strong profitability. The company's cost of production mainly benefits from material silver and copper byproduct revenues, which also provide a degree of commodity diversification.
Our business risk assessment also takes into account the expected volatility of the company's profitability, which is highly sensitive to metals price and input cost fluctuations. In addition, we consider Yamana to have weaker operating diversity than that of its investment-grade gold producing peers. We expect the company will continue to rely heavily on its three cornerstone mines--El Penon (in Chile), Canadian Malartic (in Canada), and Chapada (in Brazil, which generates meaningful copper output) for the majority of earnings, as its remaining mines are generally of smaller scale.
The stable outlook reflects our expectation that the company will generate improvement in its core ratios over the next two years, with stronger earnings and cash flow and lower gross debt levels. We expect the company will generate adjusted debt-to-EBITDA in the mid-2x area and FFO-to-debt of about 30% over this period. The increase in our gold price assumptions through 2018 is primarily responsible for the improvement in Yamana's estimated core credit ratios.
We could lower the ratings on Yamana if we believe the company will generate adjusted debt-to-EBITDA that exceeds 3x or if it sustains FFO-to-debt near 20% at least over the next 12 months. In this scenario, we would expect gold prices to decline from our assumptions or Yamana's cash cost position to materially weaken. Operating issues or project cost-overruns that limit debt reduction from cash flow could also pressure the rating.
We could raise our rating if we expect the company will generate adjusted debt-to-EBITDA below 2x and FFO-to-debt in the mid-40% area for a sustained period. In this scenario, we would expect earnings and cash flow growth mainly from realized gold prices above our current assumptions while maintaining a relatively stable or improved cost profile, or higher-than-expected debt repayment. An improved business risk assessment could also lead to an upgrade.
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