DBRS Comments on Barrick’s $625 Million Silver Financing

DBRS notes that today Barrick Gold Corporation (Barrick or the Company) announced that it has entered into an agreement with Silver Wheaton Corp. (Silver Wheaton) to sell 25% of the life-of-mine silver production from Barrick’s Pascua-Lama project and 100% of silver production from the currently operating Lagunas Norte, Pierina and Veladero mines until project completion at Pascua-Lama to Silver Wheaton for approximately $625 million. Barrick expects the transaction to close on or about September 22, 2009. DBRS views the transaction with Silver Wheaton, if completed as indicated, as a positive diversification of Barrick’s financing sources and an attractive mechanism to reduce the Company’s net investment exposure to the Pascua-Lama although not sufficiently material to warrant any rating action.

Upon closing of the agreement, Silver Wheaton is expected to make a cash deposit of $212.5 million to Barrick, followed by three further deposits of $137.5 million on the first, second and third anniversaries of the closing of the transaction. Barrick will start silver delivery to Silver Wheaton with an effective date of September 1, 2009, based on production from the existing Lagunas Norte, Pierina and Veladero mines. Silver deliveries to Silver Wheaton will become based on Pascua-Lama production on the later of January 1, 2014, or project completion. The mine is expected to commence production in 2013.

Silver Wheaton will also make ongoing production payments in cash of the lesser of $3.90 per ounce (subject to a 1% annual inflation adjustment starting three years after project completion at Pascua-Lama) and the prevailing market price for each ounce of silver delivered under the agreement. The remaining 75% of silver production from Pascua-Lama will be sold at market prices.

Barrick cautions that in certain circumstances, including failure to achieve project completion and customary events of default, the agreement with Silver Wheaton may be terminated. In such an event, Barrick may be required to return to Silver Wheaton the upfront cash deposit of $625 million less a credit for silver delivered up to the date of that event. The cash payment would be determined using the difference between the market price and $3.90 per ounce for silver deliveries where the prevailing market price exceeded $3.90 per ounce.

Barrick has a solid business profile as the largest gold producer in the world as well as strong financial metrics, but the Company is also engaged in the aggressive development of its extensive gold-oriented project pipeline, with new mines or major expansions under construction in the United States, Dominican Republic and Tanzania, in addition to the $2.8 billion to $3.0 billion Pascua-Lama project. DBRS expects Barrick to generate strong operating cash flows throughout 2009 as stable gold production and high gold prices serve to offset a decline in copper prices from 2008 levels. Operating cost increases, which have been high over the last couple of years, are expected to moderate as the prices of key inputs such as fuel and sulphur have dropped significantly. The Company’s ambitious expansion program is expected to continue unabated as long as gold prices remain strong, and acquisitions cannot be ruled out.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.