News Column

Rising bond yields push mining firms to favour bank loans

February 18, 2014

South African mining firms might turn to bank loans for financing this year because the bond market was too expensive, Gold Fields chief executive Nick Holland said last week.

"I don't think the bond market is a great place to fish for financing at the moment," Holland said. "The yield curve has changed, the spreads have increased. The syndicated markets are probably better."

Emerging market debt has been rocked this year by a sell-off triggered by US tapering of monetary stimulus, with South African bonds the worst performers among 26 indices tracked by the European Federation of Financial Analysts Societies.

Mining companies have also been buffeted by falling metal prices and labour unrest, with at least 70 000 platinum mineworkers on strike for the past three weeks.

The average premium investors demand to hold dollar debt of emerging market metals and mining companies over US treasuries has increased 30 basis points this year, JPMorgan Chase indices show.

South Africa is the sixth-biggest producer of gold, the price of which fell 28 percent last year, its biggest annual drop since 1981.

Gold was fixed at $1 327.50 (R14 376) an ounce yesterday afternoon in London, up $7.50 from Friday's second fix.

South Africa is also the biggest producer of platinum, which was fixed at $1 429 an ounce yesterday afternoon, up $3 from Friday's late fix.

Lenders, meanwhile, are keen to provide funds.

"Banks are open for business," Rajat Kohli, the head of mining and metals at Standard Bank, said early this month.

"There should be an uptick in activity this year. There's plenty of demand to lend to well-run companies with good projects."

African borrowers raised $35bn of syndicated loans last year compared with $30.2bn in 2012, Bloomberg data show.

The amount of money mining companies raised through loans globally increased by 6.6 percent to $113bn last year compared with 2012, while bond issuance declined 38 percent to $72bn, according to data compiled by Standard Bank, Africa's largest lender.

The spread between Gold Fields'$1bn of bonds due in October 2020 and dollar debt of other emerging market metals and mining companies has widened 18 basis points since November 1 last year.

Gold Fields had no short-term liquidity problems, Holland said.

It has been talking to banks about extending the maturities of some loans as a matter of prudence since at least November last year. About 35 percent of the company's $2bn total debt is due in the next two years, while half matures in 2020, according to the company.

"Current sentiment is that bond yields will rise so there's an expectation that coupon rates should be higher," Abri du Plessis, a fund manager at Gryphon Asset Management in Cape Town, said on Friday. "Banks will assess the risk of a project, that's why you'll get a better deal right now."

Yields on AngloGold Ashanti's$750m of bonds due in August 2022 have climbed À basis points, or 2.25 percentage points, since the start of last year to 9.1 percent, and have lost 7.3 percent on a total-return basis.

Impala Platinum's$200m of debt that is convertible to stock and matures in February 2018 has lost 9.7 percent since being sold 12 months ago.

To be sure, mining companies are able to sell bonds in rand to South African investors, according to Paul Miller, a senior investment banker at Nedbank.

"In South Africa you can raise rands at quite competitive spreads but the international markets are quite different at the moment," he said.

In December Sibanye Gold, which houses the three established South African operations spun off from Gold Fields last year, arranged R4.5bn of credit facilities linked to the three-month Johannesburg interbank agreed rate (Jibar), which is at 5.68 percent.

This includes a term loan at 2.75 percentage points above Jibar and a revolving credit facility that is 2.85 percentage points above the rate.

AngloGold Ashanti, the world's third-largest producer with 21 operations in 10 countries, sold $1.25bn of bonds carrying an 8.5 percent coupon in July last year.

"There is good capacity in the bank debt markets for quality risk," Holland said. "I think they are getting more averse to higher-risk operations and certainly we still provide a very good credit counterparty for the banks."

Pretoria News

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Source: Pretoria News (South Africa)

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