Barrick Gold Corp got its act together just in time to ride a rally in the precious metal to the best performance among Canadian firms with US dollar bonds this year.
Bonds of the world’s largest gold miner, threatened with a downgrade to junk in January, returned an average of 21.7% this year, the most among the top 50 issuers on the Bank of America Merrill Lynch US Corporate & Yankees Canadian Issuers Index. The weighted average return for the index was 2.86%, according to data compiled by Bloomberg. Basic materials companies returned 11.4% to investors.
And while gold posted its biggest gain in three decades in the first quarter, lifting all boats, what set Barrick apart from its mining peers was a deleveraging quest that saw it cut $3.1bn in debt last year by cutting costs, selling non- core assets and buying back bonds. The Toronto-based company aims to reduce its current $10bn debt load by another $2bn in 2016, according to its annual report.
In February, it offered to repurchase up to $750mn in bonds, its third buyback offer since October.
“Barrick has executed fairly well on its debt-reduction plans and I think the market is rewarding it for that,” Zachary Chavis, a portfolio manager at Sage Advisory Services, who helps manage $12bn, including Barrick debt, said by phone from Austin.
Barrick spokesman Andy Lloyd declined to comment on the company’s debt, citing its first-quarter earnings report on April 26.
From about $1,060 per ounce at the start of the year, gold - traditionally considered a haven investment - shot above $1,200 in February as volatility in stocks and China growth concerns raised speculation the US Federal Reserve may slow interest-rate increases. Gold futures gained 17% in the first three months of the year, the best quarter since 1986, and traded around $1,240 yesterday.
“If you look across the whole metals and mining space, since the middle of February it’s been on fire - we’ve done a complete 180,” Keith Hoppe, a credit analyst at Thrivent Financial for Lutherans, by phone from Minneapolis. “Some of that is what the companies have done, and a lot of it is just the market.”
Moody’s Investors Service in January placed Barrick - along with much of the rest of the commodities sector - on review for downgrade, calling into question its Baa3 rating, the lowest level of investment grade. That had investors concerned that the company could get shunted into the high-yield market.
“As an investment-grade portfolio manager, your biggest worry is someone getting downgraded to high yield,” Sage Advisory’s Chavis said.
Moody’s ultimately revised the company’s outlook to negative but affirmed the rating.
“The rally in gold prices reduced the potential for downgrades,” Trey Winslett, a credit strategist at Wells Fargo Securities, said by phone from Charlotte, North Carolina. “The immediate selling pressure that you were going to see from investment-grade investors was taken off the table and, as investors got more comfortable with that, they were able to add the bonds to portfolios.”
Barrick’s widely traded 4.4% coupon bond maturing in 2021 is trading around 103 cents, up from a one-year low of about 90 cents in December, and its 4.1% bond maturing in 2023 is trading at nearly 100 cents, up from a low of about 84 cents in January.
To be sure, the company’s earnings and debt management still hinge on the price of gold, which has slid from its April high as equities rallied and risk appetite returned to the markets. Barrick’s revenue has fallen every fiscal year since 2012 as gold dropped from more than $1,700 an ounce, according to data compiled by Bloomberg.
Yet the company has managed to lower its all-in sustaining costs to $831 per ounce in 2015 from $864, and aims to get below $700 per ounce by the end of 2019, according to the annual report. That kind of belt-tightening is being noticed.
“With gold miners in general, we’re neutral,” Chavis said. “But within the gold-miner sector, I would say Barrick is still the name to own.”
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