Barrick Gold Corp. (ABX), the largest miner of the metal, has gone from the worst performer to the best among Canadian firms with U.S. dollar bonds, on bets gold prices have bottomed out after the biggest drop in 90 years.
Barrick bonds returned an average 3.2 percent this month, the most among the 50 largest issuers tracked by the Bank of America Merrill Lynch U.S. Corporate & Yankees Canadian Issuers Index. Barrick’s 5.25 percent notes due in April 2042 rose 5.1 percent in July, the biggest advance in the index. Last month the company’s debt was the biggest loser among the largest issuers on the index with a 10 percent decline, the data show.
Gold miners, including Goldcorp Inc. (G), the world’s biggest by market value, have announced at least $15 billion of writedowns in the past two months after the precious metal’s steepest quarterly drop in London trading in more than nine decades. The metal’s price has risen from almost a three-year low at the end of June, when Barrick announced it may write down as much as $5.5 billion.
“I think there’s a good chance we bottomed out,” said Scott MacDonald, who helps manage $600 million as head of research at MC Asset Management Holdings LLC in Stamford Connecticut. “You had a bubble in prices. You burst the bubble. Prices became more reasonable, and investors now feel the water is OK to go back in.”
The rise in Barrick debt this month compares with a 0.6 percent return for the Yankee index and a gain of 0.3 percent for Canadian corporate debt. Even with the July rally, Barrick bonds have declined 14 percent this year, compared with a 3.2 percent decline in the Yankee index.
Elsewhere in credit markets, Canda’s 10-year benchmark government bonds fell, with yields rising three basis points or 0.03 percentage point. The 1.5 percent security maturing in June 2023 lost 23 cents to C$91.53.
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government fell two basis points last week, or 0.02 percentage point, to 122 basis points, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields rose to 3.14 percent, from 3.09 percent July 19.
Spreads on provincial bonds rose one basis point, or 0.01 percentage point last week to 73 basis points, according to Bank of America’s Canadian Provincial & Municipal Index. Yields increased to 2.95 percent, from 2.88 percent.
Corporate debt has gained 0.09 percent this year while provincial securities have lost 2.4 percent. Federal-government bonds have dropped 2.4 percent, Merrill Lynch data show.
Gold futures in New York have risen 8.4 percent this month to $1,333.40 an ounce, the first monthly rise since November. The metal could rise to $1,600 an ounce by the end of the year, Commerzbank AG, Germany’s second-biggest bank, said in a note July 15. Gold will end the year at $1,314 per ounce, according to the median forecast in a Bloomberg survey of 27 economists.
“That’s led some people to believe that perhaps that drop” to $1,250 an ounce in June was a floor, said Keith Hoppe, who helps manage $82 billion as an analyst at Thrivent Financial for Lutherans, by phone from Minneapolis. “When the gold price firmed up, people are looking at it thinking, ‘Well, a lot of the time the markets overreact.’ And perhaps they sold off the Barrick bonds too much and they decided to step back in and buy.”
Barrick’s credit rating was cut to Baa2 with a negative outlook by Moody’s Investors Service on April 24. Two days later it was cut to BBB with a negative outlook by Standard & Poor’s, which cited the company’s rising debt and delays at its Pascua-Lama project in Chile and Argentina.
The Toronto-based miner, whose shares have plunged almost by half this year, has responded by cutting costs and selling assets. The company announced C$455 million of asset sales in the past month.
The cost to insure Barrick’s debt from default for five years fell the most last week among 27 Canadian issuers with U.S. dollar debt, dropping 13 basis points to 293 basis points, according to prices compiled by Bloomberg.
A basis point equals $1,000 annually on a contract protecting $10 million of debt.
“Barrick made announcements that they’re going to protect their balance sheet and their rating,” Hoppe said. “With some ratings pressure they have some levers to pull and Barrick has demonstrated that they’re going to do that.”
The company is expected to report Aug. 1 that second-quarter profit excluding one-time items fell 26 percent to 58 cents a share, according to the average of 19 analysts’ estimates compiled by Bloomberg.
The company said July 1 it may take a writedown of as much as $5.5 billion on its Pascua-Lama project. It also slowed construction, bringing total spending on the project in 2013 and 2014 down $1.5 billion to $1.8 billion.
“Being more profitable is better than being bigger,” Jamie Sokalsky, the company’s chief executive officer said May 22. “If we divested of some of those smaller, higher-cost assets and came down to a suite of assets that are long-lived and lower-cost and more valuable, I think that ultimately that can be a better investment proposition.”
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