Must-know: Barrick’s debt profile and credit ratings

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Why debt profiles are important

A company’s debt profile is important in good times, and even more so in an environment where commodity prices are falling. Stocks become much more sensitive to the commodity price. In this article, we’ll review Barrick Gold Corporation’s (ABX) debt standing.

Debt to Equity

Why Barrick is debt-ridden

Barrick deployed heavy amounts of capital towards certain projects that didn’t turn out as expected. Between 2010 and 2013, debt roughly doubled to more than $13 billion. The ~ $7 billion acquisition of Equinox Minerals in 2011 and the continually escalating capital costs at Pascua-Lama, drove Barrick’s debt skyward. In the case of Pascua-Lama, where original expenditures were projected at $3 billion, actual capital costs were recently estimated at $10 billion.

High debt ratios compared to peers

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At the end of June 2014, Barrick had net debt (total debt-cash and cash equivalents) of $10.6 billion. This translates to a net-debt-to-equity ratio of 0.80 and a total-debt-to-equity ratio of 0.99. Debt to equity measures a company’s financial leverage. A high debt-to-equity ratio generally means that a company has aggressively financed its growth using debt. A volatile earnings stream may result because of interest expenses.

Debt to equity

Amongst its peers, Barrick has the highest debt to equity ratio. For example, Goldcorp Inc.’s (GG) ratio is 0.17, Newmont Mining Corporation’s (NEM) ratio is 0.66, Yamana Gold Inc.’s (AUY) ratio is 0.19, and Kinross Gold Corporation’s (KGC) ratio is 0.34.

Meanwhile, as the chart above shows, Barrick’s debt-to-equity ratio came down somewhat after the December quarter, mainly due to its use of an equity issuance to pay down some of its debt.

Debt to EBITDA

This ratio is a common metric used by credit rating agencies to assess the probability of default on issued debt. A higher number suggests a firm may not be able to service its debt.

Barrick also has a high debt-to-EBITDA ratio of 3.32. By comparison, Newmont Mining Corporation’s (NEM) ratio is 2.88 and Kinross Gold Corporation’s (KGC) is 1.98.

Negative credit profile

Moody’s and Standard & Poor’s have negative outlooks on Barrick. Moody’s long-term rating of Barrick is Baa2, and Standard & Poor’s, is BBB. These ratings mean the company’s credit profile is at moderate risk and is more subject to adverse market conditions.

The analysis above shows that Barrick’s debt position is risky. The company needs to reduce its debt to secure more favorable conditions for its debt terms.

Barrick has taken several steps to reduce its debt. We’ll discuss these in the next part of this series.

Note: The VanEck Vectors Gold Miners ETF (GDX) invests in all the above-mentioned stocks while the SPDR Gold Trust ETF (GLD) provides exposure to the spot gold prices.

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