Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings assigned our ‘BB-’ long-term foreign and local currency issuer credit ratings to Uzbekistan-based Navoi Mining and Metallurgical Company (NGMK), the world’s fourth-largest gold producer.

The outlook is stable, mirroring that on the sovereign rating since S&P Global Ratings do not expect to rate NGMK above Uzbekistan.

The rating on NGMK is capped by the ‘BB-’ sovereign rating on Uzbekistan because the agency thinks the company is not protected from potentially negative government intervention. NGMK is one of the largest corporates in Uzbekistan and is the single largest source of revenue for the government, with roughly 16.7% of the state budget coming from the company in 2023 through royalties, income taxes, and dividends. 

The government owns 100% of the company and has a very strong representation on its board. S&P Global Ratings therefore consider that there are no sufficient protection mechanisms that would prevent negative government intervention if the state wanted extra cash from the company (for instance, due to sovereign financial stress). The government of Uzbekistan has increased its spending and views taxes and dividends from the largest cash-generating companies as an important source. S&P Global Ratings have seen the government leverage its influence with major corporates over the past few years. 

For example, it has mandated a large investment program on national gas producer Uzbekneftegaz while also extracting sizable dividends from it, which resulted in a material increase in leverage. Similarly, 100% state-owned copper producer Almalyk MMC is in the middle of a large expansion project but is also paying large dividends, causing leverage to increase faster than expected. 

NGMK’s financial policy of debt to EBITDA of 1x is untested, and S&P Global Ratings see a risk that the government’s pursuit for dividends might prevail. In the next few years, S&P Global Ratings will monitor how the decision-making around dividends at the government level evolves, especially in relation to the company’s financial policy.

The agency’s assessment of NGMK’s business balances the company’s large scale of production and low costs with its exposure to high country risk and dependence on a single mine. NGMK ended 2023 as the fourth-largest gold producer globally with 2.9 moz of production. Its mineral resources, which the company estimates at about 148 moz, should allow it to remain among the largest gold miners globally for years to come. Also, its resource base gives it sufficient flexibility to increase production. The company is due to achieve production growth of about 30% between 2017 and 2024, from 2.4 moz to 3.1 moz, two years ahead of original schedule. Its new investment program should further drive production to about 3.5 moz in 2030. 

Importantly, NGMK’s total cash cost at $745 per ounce of gold (/oz) in 2023 is one the lowest among our rated companies. Low cost of production is underpinned by high-quality ore reserves, mainly open pit mining, low labor costs, and well invested asset base. NGMK’s activities are mainly located in one region of Uzbekistan, where it owns well-developed transportation infrastructure (including railways), as well as repair and mechanical shops which allow it to produce and repair a large amount of machinery and spare parts (it even has internal production of mills). Importantly, S&P Global Ratings think that NGMK’s cash cost of production will grow modestly over the next few years, which is important considering rapid cost growth in gold mining internationally. 

NGMK’s business assessment is largely constrained by its exposure to Uzbekistan, which S&P Global Ratings consider a high-risk country with evolving regulations and governance standards. Furthermore, NGMK’s largest mine--and one of the largest in the world--Muruntau-Myutenbay produces about 60% of its output and is expected to maintain this share in the coming years. Any major accident at Muruntau-Myutenbay could materially hurt the company’s operational results and cash flows.

Although S&P Global Ratings expect NGMK to maintain conservative credit metrics, with FFO to debt being above 60% in the coming years, the company’s evolving financial and dividend policies present a risk of higher leverage. S&P Global Ratings expect that under the currently supportive gold price environment NGMK will deliver strong operating and financial results in the coming years with S&P Global Ratings-adjusted EBITDA reaching $3.9 billion-$4.0 billion in 2024, compared with $3.3 billion delivered in 2023. This is largely due to our expectation of gold prices being on average $2,150/oz in 2024, compared with $1,944/oz in 2023. S&P Global Ratings expect gold prices to reduce from currently record-high levels to $2,000/oz in 2025 and $1,700/oz in 2026 and beyond, which should result in lower EBITDA of $3.5 billion-$3.6 billion in 2025 and $2.6 billion-$2.7 billion in 2026. 

The company will be able to comfortably finance its relatively modest capital expenditure (capex) of $450 million-$550 million per year, which should ensure smooth organic growth of production. Dividends represent a materially higher cash outflow for NGMK with our expectation that the company will pay 100% of its net income as dividend. Still, S&P Global Ratings expect that FFO to debt will remain above 60% under this scenario. The key risk for NGMK’s leverage metrics is if the company distributes more than 100% of income to the shareholder (through financial aid to the state for example, as in the case with Almalyk MMC in 2022). Additional pressure on its leverage metrics would stem from an upward revision of its capex program, which would result in faster leverage accumulation, as NGMK’s net income-based financial policy does not necessarily take investments into account.

Compared with peers’, NGMK’s ‘bb+’ SACP benefits from low costs and large scale of production but is constrained by asset concentration in Uzbekistan as well as evolving financial profile. S&P Global Ratings view AngloGold Ashanti PLC (BB+/Stable/--) and Gold Fields Ltd. (BBB-/Stable/A-3) as NGMK’s closest peers. The companies are comparable in size of production, while NGMK’s cost advantage is balanced by the peers’ materially higher jurisdiction and asset diversity. 

S&P Global Ratings view asset diversification as an important factor for the mining companies due to its high inherent operating risk, where operational disruptions are not uncommon. Equally, geographic diversification reduces the risks of changing regulations and rules, such as mining taxes, which are also not uncommon in the mining industry. For example, S&P Global Ratings make a negative peer comparison adjustment for AngloGold Ashanti because S&P Global Ratings see its country risk as elevated. On the financial side, the peers’ well established conservative financial and treasury policies, proven access to capital markets and liquidity management are a differentiating factor. 

Alongside the constraints S&P Global Ratings see from the government’s evolving position regarding leverage is NGMK lack of a track record accessing international capital markets. Its liquidity and treasury policies are also evolving--the company relies only on cash flows to meet its cash needs, with no committed liquidity lines available. Furthermore, NGMK keeps very limited cash on its balance sheet; in our view, the about $2 million of available cash at the end of 2023 is a very low amount for a company of this size. S&P Global Ratings understand that NGMK pays all the cash it accumulates to state as dividends monthly, which makes it vulnerable to liquidity shortages in case of operational disruptions. 

S&P Global Ratings expect that over time NGMK will build a track record of a more prudent liquidity and treasury management, as well as access to capital markets, resulting in a reduced reliance on its cash flow for liquidity. S&P Global Ratings note that larger peers Newmont Corp. (BBB+/Stable/--) and Barrick Gold Corp. (BBB+/Stable/A-2) have even better diversification as well strong liquidity profiles and established financial policies.

The stable outlook on NGMK mirrors that on Uzbekistan. S&P Global Ratings asses NGMK’s SACP at ‘bb+’ but S&P Global Ratings cap the rating at the level of the rating on Uzbekistan, ‘BB-’. This is because the agency thinks NGMK is not protected from negative government intervention in case of financial stress at the sovereign, which might prompt the government to demand additional cash from NGMK via taxes, royalties, or dividends. In case of sovereign stress, it may be forced to provide additional support to the state budget, through various forms, as there are no regulatory or contractual protections for NGMK from government’s intervention.

S&P Global Ratings could likely downgrade NGMK if the agency took a similar action on Uzbekistan. S&P Global Ratings could also lower the rating if NGMK’s SACP were to fall to ‘b+’, although S&P Global Ratings do not forecast such a scenario at this time. A downward revision of the SACP might stem from a major operational setback, leading to materially reduced cash flows coupled with high capex needs to restore production, thereby resulting in materially higher leverage. Large acquisitions or excessive shareholder distributions in any form leading to a material increase in leverage, as well as a material deterioration of liquidity cramping the company’s ability to repay or refinance maturing debt, could put material pressure on the SACP.