Barrick Flips Bond Fortunes as Miner Suspends Dig: Canada CreditCharles Mead and Cecile Gutscher
Barrick Gold Corp. is reversing the fortunes of suffering bondholders with the industry’s highest returns as a stock sale and pledge to suspend construction leave it poised to produce more excess cash than competitors.
Bonds of the world’s largest gold miner have returned 2.27 percent since Barrick announced plans on Oct. 31 to sell $3 billion of equity, cut debt and shelve its Pascua-Lama mining project on the Argentina-Chile border. That compares with a 0.17 percent loss for the more than $200 billion of materials-industry debt tracked by Bloomberg and helps to offset previous losses of about 10 percent this year through Oct. 30.
While a slumping gold price and equity dilution have contributed to an 8 percent decline for shareholders this month, bond investors are benefiting as Toronto-based Barrick reins in capital spending. After burning through more cash than either of its two largest North American competitors in the last year, analysts now estimate Barrick will lead the pack in 2014 with $636 million of excess funds.
“They’ve done more than other companies to readjust their cost structure and to strengthen the balance sheet and bolster liquidity,” said Susan Hutman, a New York-based credit analyst at AllianceBernstein LP, which oversees $250 billion of fixed-income assets including Barrick debt. “Barrick remains better positioned than other investment-grade gold peers.”
Elsewhere in credit markets, Canadian government bonds were little changed, with the benchmark 10-year security yielding 2.56 percent at 9:44 a.m. in Toronto.
The extra yield investors demand to own the debt of investment-grade corporations rather than of the federal government was unchanged yesterday from a day earlier at 119 basis points, or 1.19 percentage points, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields increased to 3.11 percent, from 3.09 percent on Nov. 18.
The premium investors demand for provincial debt compared to federal benchmarks held steady at 69 basis points, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index. Yields rose to 2.98 percent, from 2.96 percent at the start of the week.
Corporate debt has returned 1 percent this year, compared with losses of 1.9 percent for provincial debt and 1.8 percent for federal-government securities, Merrill Lynch indexes show.
Barrick has also supported its debt with a $1.5 billion tender offer that prioritizes shorter-maturity notes, along with a plan to pay down $1.1 billion of obligations that mature next year. The company said Nov. 18 that investors had agreed to tender more than $3.5 billion of its bonds.
The miner, rated Baa2 at Moody’s Investors Service and an equivalent BBB by Standard & Poor’s, has been working to repair its finances amid $10.6 billion of losses in the last 12 months that included $8.7 billion of writedowns in the second quarter.
Before completing Canada’s biggest equity issue since 2009 on Nov. 14, it divested three mines in Australia for $270 million and cut its quarterly dividend to 5 cents a share from 20 cents. Capital expenditures may drop to $2.96 billion next year, down from $6.1 billion in the 12 months ended Sept. 30, helping to erase a cash burn that depleted $1.2 billion of funds in the past year, data compiled by Bloomberg show.
“With everything they’ve been doing, like issuing equity and reducing debt, that’s really helped to draw spreads tighter,” said Wen Li, an analyst at CreditSights Inc. in New York, who favors Barrick debt relative to obligations of Newmont Mining Corp. The Pascua-Lama project “has been a very big cash outflow, and because they’re going to suspend it, it’s going to really help.”
Barrick’s returns this month are more than six times the 0.35 percent gain delivered by Newmont, the second-largest gold producer, and compare with a 0.25 percent loss for the $3.74 trillion U.S. investment-grade market. That still leaves 10-year Barrick debt yielding about 5.28 percent, or 94 basis points more than similar-maturity borrowing costs for issuers in the BBB rating tier, Bloomberg Valuation estimates show.
The bonds “have had quite a run,” said Zachary Chavis, a credit trader at Austin, Texas-based Sage Advisory Services Ltd., which oversees about $10 billion and has been increasing its exposure to miners including Barrick. “From a bondholder perspective, you’re not worried about management in the short term hurting you” with debt-financed shareholder rewards.
Andy Lloyd, a Barrick spokesman, didn’t immediately return requests yesterday seeking comment on the company’s finances.
Barrick’s bond prices now imply a higher credit rating of Baa1 after trading at junk levels last month, according to Moody’s Analytics, though both Moody’s and S&P reiterated negative outlooks on Nov. 1. While the company is improving its leverage and liquidity positions by repaying shorter-maturity bonds, it still faces the risk of a further deterioration in the price of gold.
“Their negative outlooks may reflect a wait-and-see approach with respect to the direction of gold prices,” AllianceBernstein’s Hutman said.
The metal has dropped more than 20 percent this year to $1,276 per ounce, leaving it on pace for its first annual loss in more than a decade. The declines may deepen as the Federal Reserve begins to diminish its unprecedented asset purchases, and Barrick’s recent actions signal its management expects a further drop in prices, according to Li of CreditSights.
“That’s why they’ve been so aggressive in cutting costs and issuing equity,” Li said. “They’re positioning themselves for a downturn.”
Barrick may be better prepared to weather a continuing slump than its competitors. The company’s all-in sustaining costs of $916 per ounce are the lowest among peers including Newmont, Goldcorp Inc. and AngloGold Ashanti Ltd., which ranks highest with all-in costs of $1,155 per ounce, Harry Mateer, an analyst at Barclays Plc in New York, wrote in a Nov. 18 report.
While suspending work at Pascua-Lama will probably push capital spending below the cash generated from operations in 2014 for the first year since 2011, Barrick’s long-term prospects may suffer without additional investment.
“Gold producers with no growth pipelines are susceptible to falling output and higher costs as grades decline over time,” Mateer wrote in the report. “Barrick’s output will likely fall, and production costs could rise, beginning in 2016 absent any other growth initiatives.”