DBRS Confirms Barrick at “A” Following Plan to Eliminate Gold Hedge

DBRS has today confirmed the Senior Unsecured Debt of Barrick Gold Corporation (Barrick or the Company) at “A” and its Commercial Paper at R-1 (low). The trend for all ratings is Stable. The confirmation of Barrick’s ratings follows the Company’s announcement that it has entered into an agreement to issue 94.8 million common shares of Barrick at a price of $36.95 per share by way of a bought-deal public offering. The Company intends to use the approximately $3.4 billion of net proceeds to eliminate liabilities under its gold hedge contracts. DBRS notes the equity issue will significantly reduce Barrick’s liability associated with the obligation to resolve hedge contracts for gold established at prices well below current market levels, providing the prospect of higher earnings and cash flow in the future. An expected $5.6 billion charge to earnings will result in modestly higher pro forma leverage on what is currently a strong balance sheet.

Barrick’s future earnings and cash flow can be expected to be more volatile as a result of greater exposure to spot-market gold prices during a period when the Company plans to invest heavily in expanding gold production, which weakens the Company’s business profile from the perspective of debtholders. Given the Company’s increased exposure to the volatile price of gold and its heavy capital investment program, its ratings could become more vulnerable to negative rating actions if leverage increases as a result of capital spending or acquisitions or if there is a protracted downtrend in the price of gold, both of which would erode the Company’s financial metrics.

The Company intends to use the net proceeds of the offering of approximately $3.4 billion to eliminate hedge liabilities on approximately 3.0 million ounces of fixed-priced, non-participating gold hedge contracts within the next 12 months and to eliminate approximately $1.5 billion of the liability associated with its floating spot-price (fully participating) gold hedge contracts. At June 30, 2009, Barrick’s hedge book included hedges on 9.5 million ounces of gold compared with estimated 2009 gold production of 7.2 million to 7.6 million ounces. The marked-to-market value of those hedges at the end of the second quarter was a $5.3 billion liability, which under pre-transaction circumstances could have been expected to be resolved over a number of years. The transaction is expected to result in no change in the Company’s cash balances and a net $2.2 billion reduction to shareholders’ equity after giving consideration to the equity issue. The size of the overall transaction is subject to a 30-day over-allotment option held by the underwriters, which could increase the equity issue to $4.0 billion and further reduce the liability associated with the fully participating gold hedge contracts.

Over the next 12 months, Barrick intends to eliminate the 3.0 million ounces of fixed-price contracts by purchasing gold in the open market or deliver physical gold into these contracts, which will terminate them. The size of the liability related to these contracts remains at risk until they are covered. No activity in the gold market is required to settle the floating spot-price (fully participating) gold hedge contracts. That liability remains a fixed amount as the price of gold varies.

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 recently approved $2.8 billion to $3.0 billion Pascua-Lama project on the Argentina-Chile border. 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.