Gold Miners Trade Like Junk as Bullion Sinks Below $1,200Liezel Hill and Cecile Gutscher
Barrick Gold Corp. and Kinross Gold Corp. are trading as if they’ve lost their investment-grade ratings after the price of the metal plunged 28 percent this year to the lowest since August 2010.
Barrick’s implied bond rating has deteriorated to Ba1, the highest junk rating, Moody’s Corp. said yesterday. Moody’s Investors Service’s actual rating for Toronto-based Barrick, the world’s biggest gold miner, is an investment grade Baa2. Kinross, Canada’s third-largest producer, also had an implied rating of Ba1, versus an actual rating of Baa3.
Barrick Chief Executive Officer Jamie Sokalsky is reducing spending and selling assets as gold heads for its first annual drop since 2000. Barrick, which had $12.5 billion of net debt as of March 31 and sold $3 billion of bonds in April to bolster liquidity, also faces higher costs at its delayed and over-budget billion-dollar Pascua-Lama gold project in the Andes.
“All the gold names have been pretty much getting hammered both on the credit side and the equity side for quite some time with gold prices coming down,” Wen Li, an analyst at CreditSights Inc., said in a phone interview yesterday. Pascua-Lama is also a “really big overhang” for Barrick, he said.
Barrick’s bonds have declined 12 percent since May 1, the fourth-biggest drop among issuers in Bank of America Merrill Lynch’s U.S. Metals, Mining and Steel Index. Goldcorp Inc.’s notes have slid 9.4 percent and Kinross’s by 7 percent. The largest 50 issuers in the index have lost an average 9 percent.
“If all currently planned projects go forward, and current metals prices and financial policies continue, the simple math results in inevitable pressure on credit metrics and ratings” in the industry, said Kevin McSweeney, money manager at CI Investments Inc., which oversees about $74 billion of assets.
Gold futures in New York yesterday dropped below $1,200 for the first time since August 2010, as signs of improving U.S. economic growth boosted speculation the Federal Reserve will wind down its asset-purchase program.
Gold futures for August delivery settled today at $1,223.70 an ounce on the Comex in New York, 36 percent below the record $1,923.70 reached in September 2011.
“Our investment grade rating was recently reconfirmed by all three rating agencies, with Moody’s re-confirming a Baa3 rating just earlier this month,” Steve Mitchell, a spokesman for Toronto-based Kinross, said yesterday by e-mail.
Barrick has the lowest operating costs of the senior producers and almost 60 percent of its production in the first quarter came from five mines at a cost of $591 per ounce, said Andy Lloyd, a company spokesman.
“Our debt repayment obligations in the next few years are modest, with the majority maturing beyond 2023,” Lloyd said in an e-mail yesterday.
Jeff Wilhoit, a spokesman for Vancouver-based Goldcorp, didn’t respond to telephone calls or an e-mail yesterday seeking comment on the bonds’ performance.
High-yield, or junk bonds, are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
Elsewhere in credit markets, Valeant Pharmaceuticals International Inc. issued $3.23 billion yesterday of junk bonds to finance its buyout of eye-care provider Bausch & Lomb Holdings Inc. last month.
The Laval, Quebec-based company also is planning $4.05 billion in loans to help fund the purchase. Valeant issued $1.63 billion of eight-year securities yielding 7.5 percent and $1.6 billion of five-year notes with a yield of 6.75 percent.
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government was unchanged at 124 basis points, or 1.24 percentage points yesterday, according to data compiled by Bank of America. Yields fell to 3.18 percent from 3.22 percent.
In the provincial bond market, relative yields were unchanged at 72 basis points yesterday, according to another Bank of America Merrill Lynch index. Yields dropped to 2.91 percent, from 2.96 percent.
Corporate debt has lost 0.4 percent this year, Bank of America Merrill Lynch index data show. Provincial securities have slid 2.6 percent, and federal-government bonds have dropped 2.1 percent.
The relative yield investors demand to hold Barrick’s bonds have surged to an average 332 basis points from 224 basis points on May 1, according to Bank of America. Its credit-default swaps have implied a speculative grade rating of Ba1, the highest junk rating, since mid-April and over the last two days dropped to as low as Ba3, according to Moody’s data.
Barrick could face a ratings downgrade of “another notch or so” if gold prices decline further and stay lower for a prolonged period, although it will probably remain investment grade, said Li.
“They will get hit pretty hard in terms of earnings and margins and free cash flow” at lower prices, he said.
Barrick has forecast it will cost $950 to $1,050 to produce an ounce of gold on average from all its mines this year. Goldcorp forecast a cost of $1,000 to $1,100.
Barrick’s net debt would probably increase to a peak of $15.8 billion in 2014 if it decides to cancel its Pascua-Lama project, assuming a gold price of $1,300, Anita Soni, a Toronto-based analyst at Credit Suisse Group AG, said in a note dated June 25. Net debt could rise to $17 billion in 2015 if the project on the Chile-Argentina border goes ahead.
Repayment becomes a concern with gold under $1,300, though only in the longer term because the company has good access to the debt market and $14 billion of its $17.7 billion gross debt is due in 2018 or later, she said.
Barrick had $2.34 billion in cash and equivalents as of March 31, according to data compiled by Bloomberg, and said May 2 it completed the sale of $3 billion of 5-, 10- and 30-year notes. The company also had undrawn credit of $2 billion, Chief Financial Officer Ammar Al-Joundi said on an April 24 conference call. The company’s debt repayment obligations through 2017 were less than its operating cash flow last year, he said.
Barrick, which last year raised the cost estimate for Pascua-Lama to as much as $8.5 billion, said June 3 that production won’t start in the second half of 2014 as planned, because of demands from Chile’s environmental agency, and that the delay would probably lead to higher capital costs.
Barrick will probably re-evaluate its capital spending plans in light of the current gold price, which may help reduce its financing burden, Joel Levington, managing director of corporate credit research at Brookfield Investment Management Inc. in New York, said in an e-mail.
“Barrick will be able to maintain investment-grade ratings, but a downgrade to low-BBB would not be surprising,” he said.
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