DBRS Downgrades Barrick Gold Corporation Ratings to BBB (high), Trend Negative

DBRS has today downgraded the ratings of Barrick Gold Corporation and its subsidiaries (Barrick or the Company) to BBB (high) from A (low), with a Negative trend, thereby removing the ratings from Under Review with Negative Implications, where they were placed on June 28, 2013. The rating action reflects the persistently high cost of the Company’s Lumwana copper operations; ongoing concerns over the cost and completion dates of its Pascua-Lama gold mine and other investment projects; and the deterioration of gold and copper prices and increased uncertainty with respect to gold prices going forward, all of which has led to higher debt levels, the recognition of large-scale impairments of the accounting value of the Company’s assets, and a deterioration of its credit metrics. In addition, following the downgrade of Barrick Gold Corporation’s Commercial Paper rating of R-1 (low) to R-2 (high), DBRS has today discontinued Barrick Gold Corporation’s Commercial Paper rating as Barrick does not currently issue commercial paper.

The Negative trend on Barrick’s ratings reflects the lack of clear resolution on how the Company will be able to restrain the growth of its indebtedness and deteriorating credit metrics while trying to resolve the project completion issues it faces at Pascua-Lama and the Jabal Sayid copper mine and in the face of potentially deteriorating gold and copper prices. The Negative trend may be resolved if Barrick makes clear progress in reversing the growth in indebtedness and provides sound plans for the completion of its unfinished major capital projects over the next year. Otherwise, a further downgrade of the Company’s ratings may occur.

Barrick is the world’s largest gold producer, with 3.6 million ounces of gold produced in the first half of 2013 and with five large-scale cost-competitive operations providing a sound foundation for its long-term gold production. In reaction to rising gold and copper production costs, as well as development issues, delays and cost inflation in its major mine projects, Barrick underwent a major overhaul of its senior management in 2012 and embarked on a program to reduce production costs and refocus the Company toward higher operating efficiency and higher returns (as opposed to an emphasis on gold production growth). These efforts have met with some success, but high funding needs for new mine developments and significant project delays brought on by regulatory and other issues resulted in a $1.2 billion increase in net indebtedness in 2012, despite record average realized gold prices ($1,669 per ounce) and record-high cash flow from operations.

Barrick’s net debt has increased by a further $1.5 billion year to date 2013, triggered by: (1) the drop in average realized gold prices in the first half of 2013, down 8.8% to $1,518, and further drop to about $1,200 per ounce at June 30, 2013; (2) lower copper prices; (3) continued high capital expenditures and (4) serious impediments to the development of the Pascua-Lama project. In addition, lower metal prices and an uncertain outlook for their near- to mid-term course caused the Company to take a massive impairment of its assets ($9.3 billion pre-tax and including impact on non-controlling interests), which, along with a $506 million loss (after-tax) on the sale of Barrick Energy assets, served to grind the Company’s equity base from $24.6 billion at December 31, 2012, to $16.1 billion at June 30, 2013. The percentage of gross debt in the capital structure has shot up from 36.1% at year-end 2012 to the current 49.6%. In addition, the Company’s coverage metrics have deteriorated. Barrick’s financial metrics are expected to deteriorate further as the full impact of lower gold and copper prices takes hold, despite the Company having introduced several cash conservation measures such as cutting dividends, deferring capital projects and implementing more operating cost reductions.

Barrick’s Pascua-Lama project is considered to have the potential to be a low-cost, long-lived gold producer. However, the project has been fraught with project management issues, large cost increases, regulatory issues involving environmental authorities and opposition from indigenous peoples in the development area. Most recently, Chilean authorities have fined the Company and halted construction activities on the Chilean portion of the project. Chilean authorities have mandated that Pascua-Lama’s water management system must be completed and be in compliance with the project’s environmental permit before resuming construction activities in Chile. Barrick has indicated that it intends to comply with the orders and has submitted a plan to Chilean regulatory authorities to construct the required water management system for completion by the end of 2014, which, if accepted and executed as planned, would delay start-up of Pascua-Lama to mid-2016. The Pascua-Lama re-sequencing plan is expected to reduce project capital requirements in 2013 and 2014, but overall remaining project expenditures are expected to increase, driving up the previous $8.0 billion to $8.5 billion total project cost estimate. In addition, in June 2013, a group of local farmers and indigenous communities challenged the fine and water management requirements determined by Chilean authorities as inadequate, seeking more severe sanctions including the revocation of the Pascua-Lama environmental permit. This action has not been heard and its impact on the Pascua-Lama development, timing and costs, if any, remains uncertain adding to the concerns over Pascua-Lama’s development schedule and eventual cost.

The Company’s underground copper mine development in Saudi Arabia, Jabil Sayid, has also faced unexpected delays and challenges by regulatory authorities. Although construction of the new mine is largely complete, it has failed to start production due to non-compliance with issues related to the use of explosives required for the mining process. Barrick continues to pursue the required permits, but has not set a date for their expected receipt. In addition, the Saudi authority that oversees the mining license has questioned if the change in indirect ownership of the project (the acquisition from Equinox Minerals Limited), as well as previous changes in ownership, required the prior consent of authorities. Barrick has indicated that if discussions to resolve the issues are not successful in the near term, further curtailing or suspending of activities on site may be required.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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