S&P Lowers Outlook on Yamana Gold (AUY) to Stable; Expected to Maintain 'Intermediate' Financial Risk Profile

Standard & Poor's Ratings Services today said it revised its outlook on Yamana Gold (NYSE: AUY) to stable from positive.

At the same time, Standard & Poor's affirmed its 'BB+' long-term corporate credit and senior unsecured debt ratings on Yamana. The '3' recovery rating, which corresponds with what we consider meaningful (50%-70%, at the high end of the range), recovery, is unchanged.

"The outlook revision primarily reflects our expectation that Yamana will maintain what we assess as an intermediate financial risk profile over the next two years," said Standard & Poor's credit analyst Jarrett Bilous. "Yamana's credit metrics have not improved as quickly as expected following its 50% acquisition of Osisko Mining Corp. in 2014, with leverage ratios at first-quarter 2015 considered high for the company's financial risk assessment," Mr. Bilous added.

We now estimate the company will generate an adjusted debt-to-EBITDA ratio in the mid-2x range through 2016 and funds from operations(FFO)-to-debt near 30%. At these levels, Yamana's estimated core credit measures fall short of our upside triggers for the rating and, in our view, no longer warrant a positive outlook.

Our view of Yamana's business risk profile as fair primarily reflects the company's relatively low-cost production profile and favorable profitability. Our assessment also takes into account Yamana's exposure to historically volatile commodity prices and lower earnings diversification relative to most investment-grade peers.

Our view of Yamana's financial risk profile as intermediate primarily reflects our expectation that the company's core credit measures will modestly improve over the next two years.

The stable outlook reflects our expectation for modest improvement in Yamana's core credit ratios over the next two years. In our base-case scenario, we estimate the company will generate adjusted debt-to-EBITDA in the mid-2x area and FFO-to-debt of close to 30%, which takes into account the expected monetization of Yamana's Brio Gold subsidiary.

We could lower the ratings on Yamana if the company generates adjusted debt-to-EBITDA above 3x for a sustained period, with FFO-to-debt approaching 20%. In this scenario, we would expect gold prices to average about US$1,100 per oz without a corresponding improvement in the company's cash cost position.

We could raise our rating on Yamana 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, while maintaining at least a fair business risk profile. In this scenario, we would expect earnings and cash flow growth mainly from higher average gold prices that lead to increased free operating cash flow available for debt repayment.

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