Moody’s issues a credit downgrade notice to SA miners

RATING agency Moody’s has put South African mining houses on a credit downgrade notice following last week’s gazetting of the New Mining Charter by the Department of Mineral Resources (DMR).

The notice was issued yesterday as questions persisted about whether the charter would pass Constitutional muster.

Douglas Rowlings, an analyst at Moody’s, yesterday said in a report that the charter was “credit negative” for South African mining companies because a number of the requirements would add to the costs of operating mines and would reduce free cash flow generation.

“The revised mining charter was not clearly drafted and is ambiguous in many areas, allowing for a number of significantly different interpretations. It is difficult to dimension an exact magnitude of an additional equity raise, and most notably whether this would be done at a parent or mine level, as well as recognition of other equity top-up considerations,” Rowlings said.

He added that it was highly unlikely that the charter would be implemented in its current form due to it contradicting the ruling ANC policy. “The charter’s policies run counter to what was outlined in the Economic Transformation Discussion Document for the ANC’s National Policy Conference scheduled to take place at the end of the month. It may recommend that the revised mining charter be withdrawn to allow for adequate stakeholder consultation or it may recommend amendments to the current draft.” While Moody’s report did not constitute a credit rating action or imply any rating changes, it did indicate that an event or trend was negative for an issuer’s credit profile.

Moody’s currently has Anglo American at Ba1 positive, while AngloGold Ashanti is rated at Baa3 positive, and Gold Fields at Ba1 positive. Petra Diamonds has B1 positive rating, while Sibanye Gold has a Ba2 stable rating and South32 is rated at Baa1 stable.

Peter Leon, partner and co-chairperson of the Africa Group at law firm Herbert Smith Freehills, said if the Chamber of Mines and other interested parties proceed with threatened litigation, the charter would be subject to years of protracted litigation.

“As South Africa continues to slip down the rankings of the Fraser Institute’s Annual Survey of Mining Companies (principally as a result of regulatory uncertainty) it is unfortunate that the DMR has missed the opportunity to enhance regulatory certainty and promote investor confidence,” Leon said.

He said it was doubtful whether the DMR Minister Mosebenzi Zwane was empowered to introduce Mining Charter III and debatable whether it was legally binding on the mining industry.

The Mineral and Petroleum Resources Development Act Amendment Bill 2013 aimed to address this by elevating the charter to the status of legislation while giving the minister the power to amend it, but this bill was still before Parliament and unlikely to pass this year.