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Barrick Gold sees lustre fade on its bonds

Annual General Meeting of Barrick Gold, at the Metro Toronto Convention Centre, April 24, 2013. The world’s biggest gold miner has a new headache: A key debt analyst is advising investors to take a pass on the company’s bonds.

Fernando Morales/The Globe and Mail

Barrick Gold Corp. is confronting plunging bullion prices and political risk from the the indefinite suspension of work on its Pascua-Lama mine in Chile. But the world's biggest gold miner has another headache: A key debt analyst is advising investors to take a pass on the company's bonds.

Carol Levenson, director of research and co-founder of Gimme Credit LLC in New York, is panning Barrick's debt, expecting the spread between its yield and super-safe U.S. government Treasury securities to widen further.

Bond yields move in the opposite direction to prices of the securities, so the trend she expects means Barrick bond prices would weaken relative to Treasuries.

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That is why she wouldn't be in a hurry to buy the company's bonds. "It's hard to say where I would see Barrick bonds as attractive, given the negative trends and the high degree of uncertainty at this point regarding Pascua-Lama and other projects," she said in response to e-mailed questions.

She also said the gold miner is likely to have significant new issuance of debt because of its negative free cash flow, a development that could cause bond spreads to widen because of the extra supply of new fixed-income securities.

Gimme Credit caters to institutional credit market institutions, and issued a negative report on Barrick's debt late last week.

Barrick declined to comment on the report.

It was the second blow to Barrick's bonds in recent days. Moody's Investors Service downgraded the bonds to two notches above junk with a negative outlook.

Moody's said it would be unlikely to upgrade the bonds until the problems surrounding Pascua-Lama are resolved, the project is on the way to a successful completion, and the company's debt levels are reduced.

Investors in Barrick's common shares should be keeping abreast of views on the company's debts because the miner has financed many of its projects with borrowed money. The Moody's downgrade affected $11-billion (U.S.) in debt.

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Gimme Credit noted that at the end of the first quarter, Barrick's net debt was $12.5-billion, up from $2.7-billion in 2010.

Given the debt burden, the company is unlikely to be able to undertake shareholder-friendly moves any time soon and may have to concentrate on paying off some of its borrowing, according to the Gimme Credit report.

"The company's shares are down more than 50 per cent in the past year and down 46 per cent year-to-date. With its ratings already downgraded and a negative outlook from both major rating agencies, we question whether shareholder enhancement may take priority over debt reduction in the future," the firm said in its report.

Ms. Levenson tracks Barrick's 10-year bonds, which she says are yielding about 221 basis points, or hundredths of a percentage point, over comparable Treasuries. The Barrick bonds may be overpriced, relative to other issuers, and thus have further downside, in her opinion. Ms. Levenson says Alcoa, which is flirting with junk ratings, has 10-year yields of about 300 basis points over Treasuries.

Investors shrugged off the concerns of debt analysts Monday, as the price for bullion continued to recover from the two-year lows reached earlier this month and Barrick shares rallied.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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