Gold Miner Takes Corporate Credit Downgrade, Gold Price Risk

Goldman Sachs may have reversed its “short sell gold” call but the damage to the miners have been severe. Many mining stocks were down 40% year to date even with a strong stock market in 2013. While Barrick is up 3.5% today at $19.19 in late-day trading, Barrick shares are down a whopping 45% so far this year.

Moody’s said that this downgrade is based around challenges facing the company following the Chilean government’s injunction to halt construction activity. Local community claims on environmental issues are a part of the issue and there is uncertainty as to when and how this might be resolved as well as what the cost will be.

Moody’s even went on to show that this project has seen capital costs rise to an estimated $8 billion to $8.5 billion range. Other production anticipated to come on stream and contribute to an improved cost profile in Saudi Arabia has also been delayed due to government mandated issues on safety and security standards. Moody’s anticipates that Barrick will have higher negative free cash flow and additional funding requirements beyond what was previously expected. There is a real issue around the price of gold here. The ratings agency said,

“Should gold prices reach averages of $1,200/oz to $1,300/oz, we estimate debt/EBITDA could approach levels of around 5x over the next twelve to eighteen months (absent Barrick taking actions to modify their operating profile and or capital expenditures, as they have in the past). In addition, the downgrade reflects the fact that debt levels continue to be equal to about 100% of revenues and are likely to increase as a percentage of revenues in the medium term. The volatility in gold and copper prices continues to be an important aspect of the rating analysis.”

At $19.19, Barrick’s 52-week trading range is $17.51 to $43.30 and the current market capitalization rate is $19.2 billion.