Wage increases and productivity losses linked to strikes could lead Moody's Investors Service to downgrade South Africa's credit rating again.
The company said in a report published on Tuesday that it had assessed the credit impact of possible scenarios associated with these risks on Anglo American (AGA), AngloGold Ashanti (AA) and Gold Fields, as they have the "highest exposure to South Africa" in terms of the percentage contribution to their total group revenues.
The report noted that Moody's South African mining companies' credit profiles could be weakened by wage increases and productivity losses linked to strikes, but assured that geographic diversity, solid credit metrics and healthy liquidity should help to mitigate this effect.
In September, Moody's cut its rating of South Africa's debt one notch to Baa1 from A3 and kept its outlook negative, reports the Wall Street Journal.
Moody's Corporate Finance Group assistant vice president - analyst Dion Bate said; "We think that above-inflation wage increases and productivity losses linked to industrial action will be the two main event risks facing South African mining companies in the next six to 12 months."
"This is because wage negotiations with trade unions in South Africa are taking place at a time when the industry has recently experienced an uptick in strikes and changes have occurred in the representation of unions involved in the wage negotiation process, which are introducing an element of unpredictability. In addition, the industry is at a point where it could be considering implementing some restructuring measures to counteract the effects of a weaker global commodity pricing environment."
According to the report, AGA and AA are expected to be the most affected if wages rise by 10% or 15% as wages in South Africa account for 35%-60% of the companies' total cash costs in the country and 10%-20% of the total global cash costs.
Anglo Ashanti is likely to be the most vulnerable to wage demands owing to its high exposure to the platinum sector, which experienced the most widespread strike action last year, said Moody's.
Image: South African mining companies' solid metrics and healthy liquidity may help prevent a weakend credit rating. Photo: Suat Eman.