DBRS Downgrades Barrick Gold Corporation Ratings to BBB, Trend Remains Negative

DBRS has today downgraded the Issuer and Senior Unsecured debt ratings of Barrick Gold Corporation and its subsidiaries (Barrick or the Company) to BBB from BBB (high). The trend on the ratings remains Negative. The rating actions reflect the deterioration of the Company’s financial metrics in 2013 and its ongoing challenges in halting and reversing the growth of its indebtedness in the face of uncertain gold and copper prices, along with the anticipated need to fund the completion of the Pascua-Lama project before the Company can derive long-term benefit from production at that operation. Although Barrick improved its financial flexibility with a $2.9 billion equity issue in November 2013, through asset sales and by temporarily suspending Pascua-Lama construction, the Company’s equity base has been materially reduced since the end of 2011 due to asset impairments and other factors, resulting in a high proportion of debt in its capital structure at the end of 2013.

Barrick’s net free cash flow after dividend payments and before asset sales and share issuance, as calculated by DBRS, was $1.8 billion in deficit in 2013. With gold prices in 2014 to date well below the Company’s realized average gold price in 2013 ($1,407 per ounce) and lower gold production expected in 2014, Barrick will face challenges in reducing debt levels, even though it is expected to control per-ounce production costs and to reduce capital expenditures. The Company’s credit strength remains vulnerable to further material declines in gold prices (and, to a lesser extent, copper prices), as well as any unforeseen operational issues. Accordingly, the trend of Barrick’s ratings has been maintained as Negative. DBRS can be expected to reassess Barrick’s ratings and the trend as it becomes clearer whether or not the Company will be able to reduce its indebtedness from current high levels and return to sustainably generating positive net free cash flow.

DBRS placed Barrick’s ratings Under Review with Negative Implications on June 28, 2013, and downgraded the Company’s ratings to BBB (high) with a Negative trend on August 9, 2013, indicating, “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’s 2013 earnings and operating cash flow were significantly below 2012 levels, due in part to volatile and weak gold prices, which dipped below $1,200 per ounce (currently trading about $1,340 per ounce) and despite the Company having introduced several cash conservation measures, such as cutting dividends, deferring capital projects and implementing a wide range of operating cost reductions. The Company’s capital expenditures were the second-highest on record, at $5.5 billion. Combined with $508 million in dividend payments, 2013 net free cash flow as calculated by DBRS was $1.8 billion in deficit, a deterioration of over $500 million from the $1.2 billion deficit in 2012, when dividend, capital expenditure and working capital needs were all higher than in 2013. Barrick’s net debt would have increased significantly in 2013, if not for a $2.9 billion equity issue and $590 million in asset and investment dispositions, ultimately resulting in a reduction of both net debt and gross debt during the year.

Lower earnings, an eroded equity base and high debt have contributed to a significant deterioration of Barrick’s credit metrics. Barrick recorded $12.7 billion in pre-tax impairments in 2013 ($6.3 billion of impairments in 2012), contributing to a 37% ($9.6 billion) reduction in the Company’s equity base since the end of 2011 – a further result of lower gold and copper prices, as well as other factors. As well, the Jabal Sayid mine in Saudi Arabia remains idle and construction of the Pascua-Lama mine on the Chile-Argentine border has been temporarily suspended (the “unfinished major capital projects” mentioned previously).

Barrick’s proven and probable reserve base has shrunk. Lower gold prices, asset sales and 2013 production have led to a 26% reduction in Barrick’s proven plus probable gold reserves, to 104 million ounces with an average grade of 0.039 ounces per ton (approximately 1.34 grams per tonne), although assets sold tended to be higher-cost, short-lived operations. At a 2013 production rate of 7.2 million ounces, the proven and probable reserves have an implied life of 15 years. Excluding the undeveloped Pascua-Lama and Cerro Casale properties’ contributions to the implied reserve life, currently producing operations have an implied life of ten years at 2013 production rates. Additional asset sales that had not closed before December 31, 2013, further reduce the proven and probable reserve base to 102 million ounces of gold. A portion of the reserve base reduction has been due to the transfer of reserves to resources as a result of a reduction in the assumed price of gold in reserve calculations, from $1,500 per ounce in 2012 to $1,100 per ounce in 2013. In 2013, gold contained in Barrick’s measured and indicated resources increased by 16.4 million ounces to 99.4 million contained ounces, which could contribute to significantly longer implied reserve lives at higher gold prices.

Barrick has taken a number of significant actions to improve the balance between its cash inflows and outflows, as well as its financial flexibility. It remains the world’s largest gold producer, with a core of large-scale, cost-competitive gold mining operations. That said, the Company remains vulnerable to further material declines in gold prices, as well as any unforeseen operational issues.

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.

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.