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Newcrest Mining is investment grade – just

Love or loath ratings companies, when they crow the world listens and the changes they make can have a tangible impact on a company’s performance. The confirmation by rating agency Moody’s that Newcrest Mining (ASX: NCM) has been downgraded from a rating of Baa2 to Baa3 with a negative outlook may not surprise many investors, but it does reiterate the speculative nature of Newcrest as an investment.

According to Moody’s the downgrade “reflects our expectation for weaker operating and financial metrics over the next 2-3 years, following a series of production disappointments, future guidance reductions and rising cash costs.”

By Moody’s rating scale the Baa3 rating suggests Newcrest is subject to moderate credit risk and may “possess certain speculative characteristics.” It is the lowest investment grade awarded by Moody’s before a company falls from being ‘investment grade’ to ‘speculative grade’.

Moody’s has raised concerns around Newcrest’s credit metrics over the next 12 to 18 months, which put the company at a peak debt-to-EBITDA level of around 3.5-4.0 times 2014 earnings. The negative outlook attached to the rating suggests Newcrest could be at risk of being dropped further, which could mean the company pays a higher interest rate for the debt it borrows.

This would be the last thing it needs given the already thin margins the company is operating on since the price of gold started falling earlier this year.

Newcrest’s Baa3 rating now sits below the world’s largest gold miner, Canada-based Barrick Gold (NYSE: ABX). At the start of this month Moody’s reaffirmed Barrick’s rating of Baa2 in spite of the company also indicating a possible $4.5-$5.5 billion write-down.

It will be no surprise that Newcrest now sits far below many of Australia’s more stable investment icons. Telstra (ASX: TLS) for example is rated A2, while BHP Billiton (ASX: BHP), which has also been impacted by shifting commodity prices, holds an A1/P1 rating according to Moody’s website.

Foolish takeaway

There are plenty of solid, good quality companies on offer on the ASX with long-term growth potential and without the speculative qualities held by Newcrest. Moody’s may have confirmed what many investors already knew, but the downgrade could still have negative implications for the company going forward.

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Motley Fool contributor Regan Pearson does not own shares in any companies mentioned in this article.

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