Gold rout couldn’t have come at a worse time for Barrick
2015-09-01 
The biggest drop in gold prices in 30 years couldn’t have come at a worse time for Barrick Gold Corp. as the largest miner of the metal plans to expand its industry-leading debt load to replenish cash depleted by rising production costs and a court-ordered halt on developing a mine.
Bonds of the Toronto-based company have fallen 3.4 percent this year, the biggest decline in the Bank of America Merrill Lynch U.S. Metals, Mining & Steel index. Credit-default swaps on Barrick, which rise when investor confidence falls, climbed to a more than four-year high to 222.5 basis points April 18 from 157 earlier this month, according to Bloomberg prices.
Chief Executive Officer Jamie Sokalsky is cutting costs, pursuing asset sales and planning to add debt after gold’s gains of the past two years evaporated. Barrick, whose shares have fallen 52 percent in the 12 months, announced April 10 that it was stopping construction on the Chilean side of its Pascua-Lama mine in the Andes Mountains after a court accepted an injunction filed by indigenous communities concerned that water supplies would be contaminated.
“They have huge funding needs for mining projects and with gold prices coming down, earnings will come down as well, so they’ll need additional cash to fund these projects,” Wen Li, an analyst at debt researcher CreditSights Inc., said in a telephone interview. “Their credit profile will weaken from there.”
$12 Billion Debt
Andy Lloyd, a spokesman for the company, declined to comment on its efforts to raise debt.
Three acquisitions for $8.4 billion in the last five years have helped bring Barrick’s debt load to $14.8 billion, the most among gold miners worldwide, according to data compiled by Bloomberg. The company started by Peter Munk in 1983 has a market value of $19.1 billion, making it the second-most valuable company in the industry behind Goldcorp Inc., which produces less than half the amount of the metal and is valued at $24.5 billion.
“We intend to access the U.S. debt capital markets at some point this year to further extend our maturity schedule and improve our liquidity,” Sokalsky told analysts and investors during an April 24 conference call to discuss first-quarter earnings.
The miner was cut one level by Moody’s Investors Service on April 24 to Baa2, the second-lowest investment grade rating. The downgrade reflects, in part, delays on its Jabal Sayid copper mine in Saudi Arabia, which has closed over safety issues.
Gold Plunge
Standard & Poor’s lowered its credit rating on the company to BBB+ with a negative outlook from A- in July, saying forecasts for increased spending for the next two years would probably limit its ability to reduce debt.
The price of gold fell 12.4 percent to $1,348.21 an ounce over two days ended April 15, the most since 1983, Bloomberg data show. If the precious metal were to fall to about $1,250 an ounce, Barrick’s ratio of debt to earnings before interest, taxes, depreciation, and amortization might rise to five times, Moody’s said in an April 24 report. Current leverage is 2.1 times, Bloomberg data show.
Sokalsky would “like” to target a ratio close to 1.5 times, he said on the conference call.
Margin Squeeze
Margins are being squeezed as gold falls after increasing from $272 an ounce at the end of 2000. Barrick’s gross margin fell to 47.4 percent in 2012 from 56.2 percent a year earlier, Bloomberg data show. The previous CEO, Aaron Regent, unwound gold hedges to allow the company to fully benefit from rising prices. Regent left last year.
Credit-default swaps linked to the company’s debt surged last week, according to data compiled by the Depository Trust & Clearing Corp. It was the third-most traded company among 1,000 entities tracked by the registry in the week through April 19, with contracts covering a daily average of $160 million, compared with an average of $30 million the previous week. The contracts now cost 193 basis points.
Sokalsky, who took over June 6, said on the conference call that the company isn’t planning to build new mines and is looking to sell lower-return assets including its energy unit. Barrick ended talks in January to sell its 74 percent stake in African Barrick Gold Plc to China National Gold Group Corp.
Interest ‘Unclear’
“With most large companies facing cash flow deficits, and commodity prices weak, it is unclear who is going to step up and buy,” Joel Levington, managing director of corporate credit research at Brookfield Investment Management Inc., said in an e- mail. “Other negative rating actions will occur in 2013.”
A Chilean court order stopped work on the Pascua-Lama mine, located 4,500 meters (14,700 feet) above sea level in the Andes on the border with Argentina. Barrick faces as much as $10.2 million in fines from the country’s environmental regulator over water supplies. The company raised the cost estimate for the project twice last year to as much as $8.5 billion and said that output would be delayed by more than a year, beginning the second half of 2014.
Barrick may suspend the gold and silver project unless it gets certainty soon on how long it will take to lift the injunction, Sokalsky said on the conference call.
The company said in an April 24 statement that it was reducing planned capital expenditures by as much as $1.1 billion this year, and it lowered its forecast for mining costs in 2013. Barrick’s shares rose 7.5 percent that day, the most in more than three years. They rose an additional 0.8 percent yesterday to $19.06.
Cash Burn
“We endorse the cost-cutting measures announced by Barrick, and we expect that the company is likely to further improve near-term liquidity,” Greg Barnes, a Toronto-based analyst at TD Securities Inc., said in a note dated April 25.
Barrick has $1.57 billion in debt coming due by the end of 2014 with $2.34 billion in cash and equivalents, Bloomberg data show. The company burned through $930 million last year and is expected by analysts in a Bloomberg survey to consume $890 million more this year, reversing free cash flow of $342 million in 2011.
“Without a dramatic cutback in capital spending, I see the credit profile continuing to deteriorate,” Carol Levenson, an analyst at Gimme Credit LLC, wrote in an e-mail. “I have noticed that Barrick no longer brags about its high credit ratings.”
From World Minerals
Bonds of the Toronto-based company have fallen 3.4 percent this year, the biggest decline in the Bank of America Merrill Lynch U.S. Metals, Mining & Steel index. Credit-default swaps on Barrick, which rise when investor confidence falls, climbed to a more than four-year high to 222.5 basis points April 18 from 157 earlier this month, according to Bloomberg prices.
Chief Executive Officer Jamie Sokalsky is cutting costs, pursuing asset sales and planning to add debt after gold’s gains of the past two years evaporated. Barrick, whose shares have fallen 52 percent in the 12 months, announced April 10 that it was stopping construction on the Chilean side of its Pascua-Lama mine in the Andes Mountains after a court accepted an injunction filed by indigenous communities concerned that water supplies would be contaminated.
“They have huge funding needs for mining projects and with gold prices coming down, earnings will come down as well, so they’ll need additional cash to fund these projects,” Wen Li, an analyst at debt researcher CreditSights Inc., said in a telephone interview. “Their credit profile will weaken from there.”
$12 Billion Debt
Andy Lloyd, a spokesman for the company, declined to comment on its efforts to raise debt.
Three acquisitions for $8.4 billion in the last five years have helped bring Barrick’s debt load to $14.8 billion, the most among gold miners worldwide, according to data compiled by Bloomberg. The company started by Peter Munk in 1983 has a market value of $19.1 billion, making it the second-most valuable company in the industry behind Goldcorp Inc., which produces less than half the amount of the metal and is valued at $24.5 billion.
“We intend to access the U.S. debt capital markets at some point this year to further extend our maturity schedule and improve our liquidity,” Sokalsky told analysts and investors during an April 24 conference call to discuss first-quarter earnings.
The miner was cut one level by Moody’s Investors Service on April 24 to Baa2, the second-lowest investment grade rating. The downgrade reflects, in part, delays on its Jabal Sayid copper mine in Saudi Arabia, which has closed over safety issues.
Gold Plunge
Standard & Poor’s lowered its credit rating on the company to BBB+ with a negative outlook from A- in July, saying forecasts for increased spending for the next two years would probably limit its ability to reduce debt.
The price of gold fell 12.4 percent to $1,348.21 an ounce over two days ended April 15, the most since 1983, Bloomberg data show. If the precious metal were to fall to about $1,250 an ounce, Barrick’s ratio of debt to earnings before interest, taxes, depreciation, and amortization might rise to five times, Moody’s said in an April 24 report. Current leverage is 2.1 times, Bloomberg data show.
Sokalsky would “like” to target a ratio close to 1.5 times, he said on the conference call.
Margin Squeeze
Margins are being squeezed as gold falls after increasing from $272 an ounce at the end of 2000. Barrick’s gross margin fell to 47.4 percent in 2012 from 56.2 percent a year earlier, Bloomberg data show. The previous CEO, Aaron Regent, unwound gold hedges to allow the company to fully benefit from rising prices. Regent left last year.
Credit-default swaps linked to the company’s debt surged last week, according to data compiled by the Depository Trust & Clearing Corp. It was the third-most traded company among 1,000 entities tracked by the registry in the week through April 19, with contracts covering a daily average of $160 million, compared with an average of $30 million the previous week. The contracts now cost 193 basis points.
Sokalsky, who took over June 6, said on the conference call that the company isn’t planning to build new mines and is looking to sell lower-return assets including its energy unit. Barrick ended talks in January to sell its 74 percent stake in African Barrick Gold Plc to China National Gold Group Corp.
Interest ‘Unclear’
“With most large companies facing cash flow deficits, and commodity prices weak, it is unclear who is going to step up and buy,” Joel Levington, managing director of corporate credit research at Brookfield Investment Management Inc., said in an e- mail. “Other negative rating actions will occur in 2013.”
A Chilean court order stopped work on the Pascua-Lama mine, located 4,500 meters (14,700 feet) above sea level in the Andes on the border with Argentina. Barrick faces as much as $10.2 million in fines from the country’s environmental regulator over water supplies. The company raised the cost estimate for the project twice last year to as much as $8.5 billion and said that output would be delayed by more than a year, beginning the second half of 2014.
Barrick may suspend the gold and silver project unless it gets certainty soon on how long it will take to lift the injunction, Sokalsky said on the conference call.
The company said in an April 24 statement that it was reducing planned capital expenditures by as much as $1.1 billion this year, and it lowered its forecast for mining costs in 2013. Barrick’s shares rose 7.5 percent that day, the most in more than three years. They rose an additional 0.8 percent yesterday to $19.06.
Cash Burn
“We endorse the cost-cutting measures announced by Barrick, and we expect that the company is likely to further improve near-term liquidity,” Greg Barnes, a Toronto-based analyst at TD Securities Inc., said in a note dated April 25.
Barrick has $1.57 billion in debt coming due by the end of 2014 with $2.34 billion in cash and equivalents, Bloomberg data show. The company burned through $930 million last year and is expected by analysts in a Bloomberg survey to consume $890 million more this year, reversing free cash flow of $342 million in 2011.
“Without a dramatic cutback in capital spending, I see the credit profile continuing to deteriorate,” Carol Levenson, an analyst at Gimme Credit LLC, wrote in an e-mail. “I have noticed that Barrick no longer brags about its high credit ratings.”
From World Minerals
