Barrick Omen for Gold Miners With $44 Billion Debt: Commodities

Investors in gold mining stocks that have lost about half their market value this year are preparing for even more pain.

The metal is on course for its first annual drop in 13 years and forecast to extend losses in 2014. That’s pushing producers toward stock sales to pay down debt borrowed under more optimistic conditions. The 13 miners on the BI Global Senior Gold Valuation Peers Index increased their borrowings 47 percent in the past two years to $44 billion. It all adds up to more pressure on share prices.

Barrick Gold Corp., the world’s biggest gold miner, has dropped about 14 percent since announcing its share sale Oct. 31 that went on to set a benchmark by raising $2.9 billion. Equity sales risk further angering investors who have seen gold companies slash the value of holdings or halt dividend payments, according to IG Markets Ltd.

“We can’t carry on playing this game and give these companies cash all the time without getting something for it,” said David Baker, Sydney-based managing partner at Baker Steel Capital Managers LLP, which manages about $500 million that’s invested mainly in gold producers, including AngloGold Ashanti Ltd. and Harmony Gold Mining Co. “What we are saying to companies is if you have to raise capital, our terms are that we want to see a production-linked dividend.”

Baker Steel holds Perth-based Evolution Mining Ltd., which this year introduced a policy to pay a dividend equal to 2 percent of revenue from gold production.

‘Under Pressure’

The value of share sales by gold producers rose to $673 million in the three months ended Sept. 30, from $429 million the previous quarter, according to data compiled by Bloomberg.

The market value of the Peers Index has dropped to $89 billion from $169 billion at the start of the year as investors dumped gold-backed exchange-traded products at the fastest pace since the securities were created a decade ago, mirroring bullion’s steepest price drop in 32 years.

“We are going to see more gold companies coming to the market,” David Coates, a Sydney-based analyst at CIMB Group Holdings Bhd. said by phone. “A lot of these guys need money and have balance sheets that are under pressure.”

Producers have already been forced to take at least $26 billion of writedowns this year as gold plunged 29 percent, prompting billionaires John Paulson and George Soros to revise their bullion portfolios. Bullion for immediate delivery fell to the lowest settlement since August 2010 yesterday and was at $1,195.61 an ounce as at 2:49 p.m. in Singapore.

Bullion prices may fall to $1,050 an ounce by the end of next year, Jeffrey Currie, Goldman Sachs Group Inc.’s head of commodities research in New York, said in a Nov. 20 report. Gold is a “slam dunk” sell for next year as the U.S. economy extends its recovery, Currie said in an October note.

Extend Losses

He joins BNP Paribas SA, Credit Suisse Group AG and Societe Generale SA in forecasting gold will extend losses. Georgette Boele, a commodity strategist at ABN Amro Group NV, predicts gold to fall to $900 an ounce by the end of 2015.

Newcrest Mining Ltd., Australia’s largest gold producer, Kingsgate Consolidated Ltd., which owns Thailand’s biggest gold mine, and Petropavlovsk Plc, the worst performer on the FTSE All-Share Mining Index in the past 12 months, may need to raise equity to cut debt, according to Citigroup Inc.

The market is expecting a share sale by Melbourne-based Newcrest, which had its credit ratings cut this half to the lowest non-junk level at both Standard & Poor’s and Moody’s Investors Service, Baker Steel’s Baker said. Newcrest is the worst performer this year on the S&P/ASX 100 Index and hit a 10-year low this month in Sydney trading.

‘Never Say Never’

“They are running out of levers,” UBS AG analyst Jo Battershill said by phone from Sydney, adding that Newcrest could consider raising between A$1 billion ($884 million) to A$1.5 billion.

Newcrest spokesman Jason Mills reiterated comments made by executives in October and said the company had no plans to sell shares. Newmont Mining Corp., the world’s second-largest gold producer, doesn’t comment on “possible future equity sales,” spokesman Omar Jabara said in an e-mail.

“We have no plans to raise equity at present,” said Sven Lunsche, a spokesman for South Africa’s Gold Fields Ltd. Harmony Gold isn’t considering an equity raising, spokeswoman Henrika Basterfield said in an e-mail. Petropavlovsk didn’t respond to a phone call and e-mail requesting comment. Stewart Bailey, a spokesman for AngloGold Ashanti, declined to comment.

“If we are going to raise money that’s the last alternative,” Sydney-based Kingsgate’s Chief Executive Officer Gavin Thomas said by phone. “Part of our DNA is not to issue stock and I would suggest that will continue, though you can never say never.”

To be sure, companies have been taking steps to improve cash flow, with nine major producers cutting their average so-called all-in sustaining costs by 19 percent in the third-quarter, from the previous three months, according to data compiled by Bloomberg.

Company Risk

To complete a raising, Newcrest may need to offer a 20 percent discount to its current share price, already trading near decade-long lows, Evan Lucas, a Melbourne-based strategist at IG Markets, said in an interview. Investors don’t like equity raising as “your current share holding is diluted, the value of your shares is less and you take on more company risk,” he said.

Producers may have missed their best chance to sell shares, according to Peter Armstrong, chief financial officer of Silver Lake Resources Ltd., which announced an A$47.5 million equity raising on Aug. 27, after gold advanced 18 percent in two months. “At current share prices, it’s just not the right time to do it,” Armstrong said by phone from Perth.

Yet any delay by producers in selling additional shares could be a mistake, with competition for investors likely as there are “gold majors globally looking to restructure the balance sheet through capital raisings,” Goldman Sachs Australia Pty analyst Paul Hissey said this month in a report.

“The market may already be expecting a rush of discounted raisings and as such, we believe companies are likely to execute a better deal early, rather than late,” Hissey said.

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