Gold Miners’ Debt Hangover Eases as Bullion Gets Brexit Boost

(Bloomberg) -- A surge in the price of bullion is proving the perfect antidote to gold miners' record debt chalked up over the past decade.

The metal has climbed 26 percent in 2016, the best start to a year in four decades, giving producers more cash to repay loans or retire debt. The windfall is even bigger for mines in South Africa and Australia, where revenue in dollars is going a lot further because of weaker currencies used to pay workers and run operations.

AngloGold Ashanti Ltd. and Gold Fields Ltd., both based in Johannesburg, are buying back debt, and the yields on their bonds have halved since January. The surge in bullion this year is a bonanza for an industry that borrowed record amounts to expand output after prices reached all-time highs in 2011, only to endure reduced earnings and even losses as prices began a three-year slump.

“Increasing revenues combined with reducing production costs have widened Ebitda margins and lifted free cash-flow generation,” Douglas Rowlings, a Dubai-based analyst at Moody's Investors Service, said by e-mail. “Both companies are taking advantage of the current operating environment to deliver on continued deleveraging.”

Fulfilling its role as a haven in times of economic turmoil, gold has attracted investors this year after the U.K. voted to leave the European Union, the Federal Reserve dialed back expectations for rate increases and a slowdown in China weighed on global growth.

Welcome Boost

The surge in gold has come as a welcome boost for the world's biggest miners of the metal, who racked up record debt during bullion's bull run to 2011 and struggled to pay it back once prices fell. AngloGold and Gold Fields have the further benefit of weak currencies in their biggest-producing regions, helping to lower costs. The South African rand and Australian dollar are down 22 percent and 9.5 percent respectively against the greenback over the past 18 months.

Yields on AngloGold's $700 million of bonds due April 2020 have dropped to 4.27 percent, from 8.8 percent at the beginning of the year. Gold Fields' $852 million of bonds due the same year have seen yields plunge to 5.28 percent from 11.8 percent. Both now trade at the biggest discount to the JPMorgan Chase & Co. yield index of emerging-markets miners for three years.

The two companies are also repurchasing debt to reduce their interest bill. AngloGold bought back $775 million of a $1.25 billion high-yield bond last year and plans to redeem the remainder. The security was sold in 2013, when gold was plunging and the company needed funds to finish building two new mines -- Tropicana in Australia and Kibali in Democratic Republic of Congo.

Gold Fields, which bought three Barrick Gold Corp. mines in 2013 to make Australia its largest-producing country, has cut its net debt by about $150 million this year after it raised money from shareholders and used credit facilities to buy back bonds.

That chimes with other large gold producers, whose collective net debt has reduced to about $20 billion from a peak of $30 billion in the first quarter of 2015, according to data compiled by Bloomberg Intelligence. Net borrowing, or debt minus cash on hand, rose almost 10-fold from 2011 to 2015 as bullion plunged from its September 2011 peak of $1,921.17 an ounce.

To contact the reporter on this story: Kevin Crowley in Johannesburg at kcrowley1@bloomberg.net. To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Ana Monteiro, Antony Sguazzin