Barrick Gold Sells Shares to Fix Balance Sheet

Barrick Gold Corp. is raising at least $3 billion in Canada’s biggest equity issue since 2009 and shelving its embattled Pascua-Lama project as the miner scrambles to reduce debt after the metal plunged this year.

Barrick, the world’s largest gold miner, said yesterday it agreed to sell at least 163.5 million shares for $18.35 apiece. News of the share sale came hours after Barrick said it was suspending construction at Pascua-Lama, a $8.5 billion mine on the Argentina-Chile border. Barrick fell 7.1 percent to close at $18.01 today in New York.

The Toronto-based company has come under pressure after gold prices fell 22 percent this year and debt increased. Chief Executive Officer Jamie Sokalsky has explored other cash-raising options ranging from a strategic equity investment to a sale of a stake in its copper business or Pascua-Lama, people with knowledge of the matter said Oct. 30. The equity sale may signal a shifting outlook for gold prices at Barrick, said John Goldsmith, at Montrusco Bolton Investment Inc. in Toronto.

“It signals that Barrick’s board, at the margin, has become much more bearish on commodity prices,” Goldsmith, who helps manage about C$5.6 billion ($5.4 billion), said in a phone interview. “To come out with a deal as dilutive as this is, views must have changed somewhere among top-level management and the board.”

‘Difficult to Assess’

The sale is being underwritten by a group led by RBC Capital Markets, Barclays Plc and GMP Securities LP. There’s an over-allotment option that means the sale could fetch as much as $3.45 billion.

“This equity issue could be demonstrating financial prudence or it could suggest that 2014 operating results will be weaker than the market currently expects,” John Bridges, a New York-based analyst at JPMorgan Chase & Co., said in a note. “Without detailed production and cost guidance for the next few years, it’s difficult to assess the reasoning.”

Andy Lloyd, a Barrick spokesman, declined to comment on the offering beyond yesterday’s statements.

The deal will be the second-largest share sale in Canada, after Barrick’s $4.03 billion financing in September 2009, according to data compiled by Bloomberg. The offer price in that deal was $36.95 a share.

Bonds Buyback

Barrick plans to use $2.6 billion of the proceeds from its latest offering to buy back bonds. Its long-term debt rose 20 percent to $14.6 billion this year through the end of September. Keeping an investment-grade credit rating is important to the company, Chief Financial Officer Ammar Al-Joundi said yesterday on its third-quarter earnings call, before the sale was announced.

The share sale is “prudent,” said David West, a Toronto-based analyst at Salman Partners Inc., who rates Barrick a hold with a C$21.50 price target.

“They’re carrying much more debt than they’re comfortable with,” West said in a phone interview. “With the lower gold price, this is really an opportunity for Barrick to do a reset financially.”

In April, Moody’s Investors Service and Standard & Poor’s cut their ratings on Barrick’s credit to the second-lowest investment grade. Moody’s and S&P cited problems the miner was having with Pascua-Lama. Barrick may have come under more pressure from the ratings companies, said Kerry Smith, a Toronto-based analyst at Haywood Securities Inc.

Credit Ratings

“I thought maybe with the deferral of Pascua-Lama they might not have to do anything but I guess they are worried about their credit ratings,” Smith said yesterday.

Construction at Pascua-Lama, located more than 12,000 feet (3,657 meters) up in the Andes mountains, was already partially halted amid concerns from local groups about potential water contamination. Barrick said yesterday that all activity except that needed for environmental protection and regulatory compliance will cease.

A restart will depend on future costs, gold prices and the regulatory and legal outlook, the company said. Barrick needs more confidence in the mine’s risk-adjusted returns before it will proceed, Sokalsky said on the earnings call.

Sokalsky, who was appointed CEO in June 2012, has already announced a series of measures to bolster profits and conserve cash following gold’s decline. His moves to slim the company through mine sales, budget cuts and job reductions represent a reversal of three decades of expansion at Barrick.

‘Difficult Hand’

The suspension of work at Pascua-Lama will cut capital spending in 2014 by as much as $1 billion and will improve near-term cash flows, he said yesterday. Barrick also said it’s targeting $500 million of additional annual savings from measures including an organizational restructuring, which involves cutting 1,850 jobs.

“You cannot argue with the fact that Sokalsky was dealt a very difficult hand of cards,” Robert Gill, a Toronto-based fund manager at Aston Hill Financial Inc., which manages C$8 billion, including Barrick shares, said by phone before the equity sale was announced. “They have to look at all the options available to them.”