Investors are losing confidence Canadian gold miners will be able to weather the worst price slump in four years without damage to their credit ratings.
Canadians tied with Mexican issuers for the worst fixed income returns in October in a global index of metals, miners and steel companies, gaining 0.4 per cent compared with an average 1 per cent, according to Merrill Lynch data. Barrick Gold Corp.'s 4.1-per-cent notes due May, 2023, have fallen to $96 (U.S.), a decline of $3 since last week.
"I would be a seller across the board," said Matt Zabloski, managing director at North Vancouver-based Delbrook Capital Advisors Inc. "You'd be crazy to buy the bonds, given the current market."
In a country that is home to more than half the world's gold companies, producers such as Barrick and Kinross Gold Corp. are working to keep investors as they seek to cut costs and bolster profit. Kinross's 5.95-per-cent notes due March, 2024, fell $3 to $94 last week.
The price of gold fell to a four-year low Oct. 31, settling at $1,171.60 an ounce. (The most-traded gold future contract in New York continued its slide Monday, closing at $1,169.80, down $1.80.) Miners also declined as large producers, including Goldcorp Inc. and Yamana Gold Inc., reported surprise net losses.
Barrick and Kinross, which both have investment-grade ratings, are trading as if they are rated junk. At the end of last week, the rating implied by Barrick's credit-default swaps fell to Ba2, three levels below its actual rating of Baa2, according to Moody's Analytics. The rating implied by trading in Kinross bonds fell to B2, five levels below its actual rating of Baa3.
"We have the lowest costs among the senior gold producers, with very good liquidity and a modest debt repayment schedule over the coming three years," Andy Lloyd, a spokesman for Toronto-based Barrick, said in an e-mail.
Kinross has cut costs and has $740-million in cash on its balance sheet, $1.5-billion of available credit in an undrawn loan, and "no immediate need to access public debt markets," said Kinross spokeswoman Andrea Mandel-Campbell.
If gold prices sink below $1,100 an ounce and stay there, producers including Barrick, Iamgold Corp. and Kinross may be downgraded by Standard & Poor's, the ratings company said last week. As declining revenue weighs on gold producers, their ability to reduce debt and invest for the future shrinks, said Jarrett Bilous, a S&P analyst in Toronto.
Barrick took on debt to buy Equinox Minerals Ltd. in 2011, leaving the company with the biggest burden in the industry. In the following two years, a plunging gold price squeezed profit margins and spurred $11.5-billion of writedowns.
Since then, Barrick has divested smaller and less profitable mines, reduced spending and sold new shares to cut debt, which peaked at nearly $16-billion. The price of its May, 2023, bonds rallied to as high as $102.50 on Aug. 20.
"Barrick and Newmont seem to be doing the right things," said Zachary Chavis, a credit trader at Austin, Tex.-based Sage Advisory Services Ltd., which oversees about $11-billion. "They can weather this. It's a matter of how deep and how long."
About a third of gold production is probably money-losing when the price of the metal is less than $1,250 an ounce, said Joe Wickwire, who manages the Fidelity Select Gold Portfolio. Société Générale SA analyst Michael Haigh, who predicted 2013's rout, forecast last week that the metal will drop to $1,000 an ounce in the next two years.
"In a weaker gold environment, cash flow declines," S&P's Mr. Bilous said. "They're going to have less ability to reduce debt or increase their cash positions."