S&P: Alamos Gold Inc. Upgraded To 'B+' From 'B' On Improved Financial Risk Profile; Outlook Stable
We estimate the company will generate an adjusted debt-to-EBITDA ratio in the low-2x area in 2016 and 2017, which is well below our previous upgrade trigger. Based on the strength of Alamos' prospective credit measures and its cash position, we believe there is a sufficient cushion to manage the risks associated with gold price volatility and high estimated development-related capital expenditures at the current rating.
We now consider Alamos' financial risk assessment as significant, which led to the upgrade. We estimate Alamos will generate growth in earnings and cash flow above our previous expectations in 2016 and 2017. The revision to our gold price assumptions over this period, as well as modest improvement in the company's cash cost position (which benefits from relative strength in the U. S. dollar because a large share of its costs are in Canadian dollars and Mexican pesos) are key drivers of the improvement. Based on relatively stable adjusted debt levels (which are not net of cash), we view Alamos' estimated core credit ratios -- including adjusted debt-to-EBITDA noted above, and funds from operations (FFO)-to-debt well above 30% -- as strong for the company's financial risk profile.
The stable outlook primarily reflects our expectation that Alamos will generate adjusted debt-to-EBITDA ratio in the low-2x area over the next 12 months amid a period of high capital expenditures for development projects.
We could lower the rating if we believe the company will generate an adjusted debt-to-EBITDA ratio that exceeds 3x over the next 12 months and FFO-to-debt below 30%. In this scenario, we would expect gold prices to decline by more than US$100/oz below our price assumption over this period, or Alamos to experience operational disruptions that lead to cash costs materially above our estimates.
Although unlikely over the next 12 months, we would upgrade the company if we consider it to have a weak business risk profile. In our view, this could occur if Alamos materially reduced its operating costs at or below average industry levels and expanded its operating breadth. We could also raise the ratings if we believe the company can generate an adjusted debt-to-EBITDA ratio sustainably below 2x.