China National Gold Group Corp. #BBB# And #cnA-# Ratings Outlook Negative

Stocks and Financial Services Press Releases Wednesday August 31, 2016 17:33
HONG KONG--31 Aug--S&P Global Ratings

HONG KONG (S&P Global Ratings) Aug. 31, 2016--S&P Global Ratings said today that it had affirmed its 'BBB' long-term corporate credit rating on China National Gold Group Corp. (CNG). The outlook is negative. At the same time, we affirmed our 'cnA-' long-term Greater China regional scale rating on the China-based gold producer.

"We affirmed the ratings on CNG because we expect an improvement in the company's cost structure and increased gold prices to ease the company's heightened debt burden," said S&P Global Ratings credit analyst Lawrence Lu. "However, inadequate cost reductions or de-leveraging remain key downside risks for the next 12 months."

We believe CNG's credit profile will deteriorate if the company fails to lower its production costs or debt level, such that its debt leverage remains high and EBITDA interest coverage remains below 2.0x in 2016. CNG's debt leverage(as measured by a ratio of debt to EBITDA) increased to 9.7x as of end-2015, compared with 7.9x in 2014. However, the increase in gold demand and upward movement of gold prices since early 2016 should help to mitigate the profit loss over the next 12 months, in our opinion.

We anticipate that CNG will continue to trim operating costs to lower indebtedness. These measures may include the optimization of existing and new mines, facilities localization, and labor reduction.
CNG's operating cash flows should continue to be heavily influenced by the unit cost of production and changes in gold prices and production volumes.

Under our current gold price assumptions, any slippage in CNG's cost-cutting initiatives, production ramp-up, or control of capital spending may weaken the company's financial risk profile to a lower category. Currently, we expect the company's EBITDA interest coverage to be 2.0x-2.5x in 2016, a level in line with our expectation for the 'BBB' rating.

We expect CNG to continue to benefit from diversified mines, potential for modest production growth, and an average gold reserve life of more than 15 years, supporting its fair business risk profile over the next 12-24 months.

Our assessment continues to focus on CNG's upstream segment because it contributes more than 70% to the group's gross profit. We view CNG's business risk profile as being at the stronger end among its close peers. The company has large downstream operations and the largest gold retail network in China.

These factors give CNG a good competitive position within China's gold industry that is not fully reflected in our business risk profile analysis.
We have therefore applied one notch of uplift to the 'bb-' anchor on CNG to signify a positive comparative rating analysis and arrive at a stand-alone credit profile of 'bb'.

The affirmed rating on CNG is three notches higher than the company's stand-alone credit profile, reflecting our view that it's highly likely that the Chinese government would extend timely and sufficient extraordinary support in time of financial distress to the company. Our view is based on CNG's very strong link with the Chinese government, and its important role in executing social economic policy and spearheading industry consolidation of

gold mines.

"The negative outlook reflects our view that CNG has a limited financial buffer for the rating over the next 12 months," said Mr. Lu. In our view, the company's cost-cutting measures and reduced capital spending may not be sufficient to mitigate any slippage in production growth at new mines or potential decline of gold and copper prices. In our base case, we forecast that CNG will improve its leverage, with a ratio of debt to EBITDA approaching 7x by the end of 2016 or early 2017, from about 9.7x in 2015.

We would lower the rating if CNG's financial performance deteriorates and falls behind our base case. This could happen if the company's EBITDA interest coverage remains below 2x, which may result from insufficient cost-cutting measures and production growth. In our base case, gold prices dropping below US$1,200/oz could also lead to lower-than-expected EBITDA interest coverage.

We may also downgrade CNG if we believe that extraordinary government support to the company has weakened.

We would revise the outlook to stable if CNG significantly lowers its production costs and increases production, such that it can sustainably improve its leverage. We could also revise the outlook to stable if the company can raise equity to ease its debt burden, or restrain aggressive expansion with debt-funded financing. We see limited upside for the rating upgrade at this moment.


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