Ratings Pressure Emerges in Gold Sector: S&P

By Ben Dummett

Associated PressThe Pueblo Viejo mine in the Dominican Republic is co-owned by Barrick and Goldcorp.

Some of the world’s biggest gold miners—led by gold giant Barrick Gold Corp.–are struggling to climb out from under increasing debt loads, raising the prospect of rating downgrades and the potential for higher financing costs to fund their projects, Standard & Poor’s Ratings Services warned Tuesday.

Among its peers, Barrick Gold ABX.T -1.83%, the world’s biggest gold producer, is plagued with the largest debt load and has the highest exposure to project cost overruns in the industry, putting it the most at risk of a possible downgrade, S&P said.

In November, Barrick raised the estimated operating costs for its massive Pascua Lama gold-silver mine on the Chile-Argentina border by up to 13% to $8.5 billion.

The ratings agency said it may need to consider another rating cut on Barrick’s debt if the gold price fell by about 25%. In July, S&P lowered Barrick’s rating to BBB+ from A- because of rising costs and production delays at Pascua-Lama.

A Barrick representative couldn’t immediately be reached for comment.

In contrast, the ratings of rivals Newmont Mining Corp. NEM -1.61% and Kinross Gold Corp. K.T -1.88% would likely only come under potential pressure after a 35% drop in the gold price over a 24-month rating horizon, S&P said. Goldcorp G.T -1.43% Inc.’s rating is the most secure. It likely wouldn’t face a downgrade unless the gold price dropped by 50% because of its strong track record of boosting output, lowering costs and maintaining a stable debt burden, S&P added.

Concern over gold miners’ debt ratings contrasts sharply with the performance of gold prices. Bullion has soared since the 2008 financial crisis, benefiting from the yellow-metal’s reputation as a safe-haven against economic uncertainty and paper currency depreciation.

That strength has helped gold producers generate healthy operating cash flows. But it has also come with rising wage and other operating costs and difficulty in finding new reserves, resulting in lagging share prices for producers and an increased need for debt to finance projects and risky acquisitions.

Barrick, Newmont, Goldcorp and Kinross together have combined debt of $25 billion, up significantly since the early 2000s when gold prices first started to rise, S&P said.

In the case of Barrick, its debt has more than tripled to close to $14 billion from $4.5 billion in 2008, mainly because of its $7.7 billion purchase of copper producer Equinox Minerals Ltd. last year. The acquisition of Equinox’s operations in Zambia gave Barrick a long-term supply of copper reserves but also exposed Barrick to a politically riskier area of the world, the agency said. It also disappointed shareholders, who consider pure gold miners more valuable than producer of significant quantities of both metals.

Meanwhile, in 2010 Kinross acquired Red Back Mining Inc. and its Tasiast mine in “politically unstable and economically weak” Mauritania for $7.1 billion, but subsequently took a big write-down in connection with the deal, S&P noted.

“We believe that the prospects are good for gold producers to expand production and reserves in Africa, but only if local conditions permit, considering the industry’s ongoing difficulties with reliable access to power, transportation, and skilled labor, as well legal and political changes that can affect a mine’s profitability,” S&P said.