DBRS Comments on Barrick Gold Corporation’s $3.0 Billion Equity Issue

DBRS today notes that Barrick Gold Corporation (Barrick or the Company) has announced a $3.0 billion bought deal equity issue with an over-allotment option that is expected to yield net proceeds in the range of $2.9 billion to $3.3 billion. The Company has also announced that it and certain of its subsidiaries have commenced a cash tender offer, which is conditional on the successful completion of the equity issue, for up to $1.5 billion of specified series of outstanding notes with maturities between 2015 and 2023. In aggregate, Barrick indicates that it intends to use $2.6 billion of net proceeds from the equity issuance to redeem or repurchase outstanding debt (or debt guaranteed by Barrick), with a focus on debt maturing in the short term and medium term. Additional net proceeds will be used for general corporate purposes, including possible additional debt purchases.

DBRS views the equity issuance and debt reduction initiatives as appropriate and prudent actions in light of the growth in the Company’s aggregate indebtedness to in excess of $15.4 billion at September 30, 2013. The high proportion of debt in Barrick’s capitalization (49% at September 30, 2013) and the uncertainty caused by volatile and lower gold prices contributed to the recent announcement of suspension of Barrick’s Pascua Lama mine construction project. DBRS considers the equity issuance, debt repurchases, the suspension of Pascua Lama and asset sales by the Company as important components of Barrick’s efforts to both restore stability to and improve its balance sheet, as well as to increase its financial flexibility in the face of uncertain gold and copper markets.

That said, the trend on DBRS’s BBB (high) rating for Barrick remains Negative, reflecting the lack of certainty if the actions taken to date will allow the Company to restrain the growth of its indebtedness and the deterioration of its coverage credit metrics (EBITDA interest coverage or debt- to-cash flow, for example, which remain solid for Barrick, but have weakened with lower earnings), with potentially deteriorating gold and copper prices. Also, the suspension of Pascua Lama can be expected to provide a material reduction in capital expenditures in 2014 and for the term of the suspension, but the ultimate costs of the project and completion date remain unclear.

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

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