DBRS Places Barrick Gold Corporation Ratings Under Review with Negative Implications

DBRS has today placed the ratings of Barrick Gold Corporation and its subsidiaries (Barrick or the Company) Under Review with Negative Implications as troubled investment decisions, declining gold prices, rising costs, high capital expenditures and difficulties with development projects have resulted in a weaker company with higher debt levels and deteriorating credit metrics. A failure to provide an appropriate plan to reverse the trend of deteriorating business profile and credit metrics can be expected to result in a downgrade of Barrick’s and its subsidiary companies’ ratings in the coming months.

Barrick remains the world’s largest gold producer with generally industry-competitive cost operations and an above-average reserve life at its gold mines, although the cost of gold and the cost copper production have risen materially in recent years. Barrick has become a significant copper producer based upon its Zaldivar mine in northern Chile and its $7.5 billion acquisition of Equinox Minerals Limited (Equinox) in 2011.

As well, Barrick has been seeking to expand its output of gold and copper through aggressive development of greenfield and brownfield mine expansions, which have elevated its capital expenditures since 2008, including $6.4 billion spent in 2012 and $1.4 billion in Q1 2013. During the same period, Barrick’s average realized gold price almost doubled, rising to $1,669 per ounce in 2012 from $872 per ounce in 2008. Despite average total cash costs per ounce rising by 32%, to $584 per ounce in 2012 from $443 in 2008, rising operating cash flows helped fund the spending program. Nonetheless, the $7.5 billion Equinox acquisition in 2011 and other net outflows have resulted in a dramatic increase in the Company’s net debt to $12.5 billion at the end of March 2013 from $2.7 billion at the end of 2010.

Over the last couple of years, the Company has faced a number of challenges, in addition to squeezed margins and growing debt levels. The Equinox transaction has been disappointing with stubbornly high costs of copper production at the acquired Lumwana operations in Zambia and Barrick’s failure to bring the Jabal Sayid copper-gold project in Saudi Arabia into production. In addition, there have been significant project management concerns, cost increases and project delays at the Company’s $8.0 billion plus Pascua Lama gold mine project straddling the Chilean-Argentine boarder. These issues, along with other concerns, have led to a significant management change at the Company and a renewed focus on cost control, profitable growth and disciplined capital allocation.

The recent precipitous drop in gold prices to about $1,200 dollars per ounce currently from just under $1,800 per ounce in September 2012, combined with copper prices that have fallen to just over $3.00 per pound from $3.75 per pound in the same time frame, have increased DBRS’s concern over Barrick’s ability to restrain its debt burden in the face of ongoing cost pressures and capital expenditure requirements.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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