Pascua-Lama woes prompt S&P to lower Barrick Gold’s credit rating
Higher forecast capex spending, combined with delays and other risks at the Pascua Lama project, prompted Standard & Poor’s to downgrade Barrick’s credit ratings.
Standard & Poor’s has downgraded Barrick Gold from “A-” to “BBB+” with a negative outlook, citing higher forecasted capital spending, as well as “execution risks surrounding Pascua-Lama”.
S&P said its downgrade “follows the company’s announcement of a capital cost increase of close to US$2.5 billion and a one-year delay to production start-up at its multi-billion-dollar Pascua-Lama gold-silver project.”
The ratings agency’s negative outlook on Barrick “reflects our view that the execution risks surrounding Pascua-Lama could potentially stretch the company’s credit measures and free operating cash flow generation beyond the levels we have assumed within our base case scenario.”
“In this scenario, we expect Barrick to generate annual EBITDA of about US$6.5 billion through 2013, with annual FFO [funds from operations] of about $4 billion, which would be consumed by increased capital expenditures.”
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What an interesting update with Barrick…. a DOWN GRADE?. Many investors believe that so-called cash costs which are $600-700 an ounce means these gold miners are making a great deal of money. However in Barrick’s case (as well as the majority of gold miners), CAPITAL EXPENDITURES are consuming a great deal of their profits.
In reality, the marginal cost for producing gold is much higher as gold miners have to replace their production with new reserves.
murphy…. had a good post yesterdays in TURD’S blog when he stated that the average ore grade for the gold miners was 1.3 g/t. I also showed that presently Barrick produced gold for the first half of 2012 at 1.46 g/t. Furthermore, the future resources of the gold miners average only 0.7 g/t. Thus, the future gold mining industry will be consuming twice as much (and probably more) energy to produce gold.
Many investors who hold mining stocks are banking on the BIG MOVE in gold and silver to shoot their stock prices to the moon. We must remember, when gold and silver finally get their big move, this may also be at the same time the US and parts of the world are experiencing a hyperinflationary event. At this time, energy, steel and all the costs that go into mining will explode along with the price of gold and silver. We may not see the big profits in the mining stocks that we are hoping for.
However, the good part of the story is the fact that as the PAPER PONZI FIAT MONETARY SCHEME collapses, there will be a mad rush into the precious metal stocks. Even though there may not be the huge profits,… there may be huge percentage moves due to being a safe haven status.
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Hmmmm, isn’t this the same Pascua-Lama where Barrick was mining for silver under a glacier? The Argentinian farmers who depend on the water from the glacier are well advised to be concerned. My only surprise is that Argentina’s president Kirchner was even the least concerned about the farmers. But it does involve silver so it probably got her attention and not because of the farmers plight. There’s 200 MOZ at at stake in this debacle so Barrick has more problems than restive farmers taking up arms against the miners, unlike the problems faced in Peru and Chile where real shots have been fired at miners. I expet that the South American silver and gold miners are going to be facing some very serious problems at the hands of the people and the grifters AKA political leaders in these countries.
AGXIIK… I believe you are referring to the so-called 200 million oz that they are in contract with Silver Wheaton. I did find out that if Pascua-Lama did not make commercial production, that Barrick would take silver from its other mines and give it to SLW. Furthermore, if Barrick’s Pascua-Lama project construction doesn’t reach a certain level, than Barrick is only contractually obligated for much less.
We will see.. however, I do agree that the South American and possible Mexico mines in the future may be at risk of increased nationalization.
SRSrocco…do you know if Barrick is unable to fulfill their Silver Wheaton contract do they have to go to the market and buy the silver or can they cash settle?
@UglyDog
I suspected that ABX would just pull Ag from their other mines – looks like SRS confirms this in his above comment.
Not sure if there is a link/declaration from ABX in regards to this?
BARRICK’S PASCUA-LAMA SILVER CONTRACT AGREEMENT
Silver Purchase Agreement
On September 8, 2009, Silver Wheaton entered into a silver purchase agreement with Barrick to acquire 25% of the life of mine silver production from Barrick’s Pascua-Lama project, as well as 100% of the silver production from their Lagunas Norte, Pierina and Veladero mines until the end of 2013. Silver Wheaton will make a total upfront cash payment of US$625 million to Barrick, of which US$487.5 million has been paid to date. The remaining US$137.5 million is due on the third anniversary of the transaction. Silver Wheaton will also make ongoing production payments of the lesser of US$3.90 (subject to an annual inflationary adjustment starting three years after achieving project completion at Pascua-Lama) and the prevailing market price, for each ounce of silver delivered under the agreement. Silver Wheaton will not share in any ongoing capital or exploration expenditures at the various mines.
Barrick has provided Silver Wheaton with a completion guarantee, requiring them to complete Pascua-Lama to at least 75% of design capacity by December 31, 2015. During 2014 and 2015, Silver Wheaton will be entitled to the silver production from the Lagunas Norte, Pierina and Veladero mines to the extent of any production shortfall at Pascua-Lama, until Barrick satisfies the completion guarantee. If Barrick fails to satisfy the requirements of the completion guarantee, the agreement may be terminated by Silver Wheaton. In such an event, Silver Wheaton would be entitled to the return of the upfront cash consideration of US$625 million less a credit for silver delivered up to the date of that event.
Barrick has granted Silver Wheaton a five year right of first refusal on any further metal stream sales in connection with Pascua-Lama, where more than 50% of the value is from silver.
http://www.silverwheaton.com/SilverStreams/Pascua-Lama/default.aspx
Steve that was the same situation as you described. SLW was involved and would want their 200 MOZ Interesting that Barrick could or would even be able to access 200 MOZ to meet that call. I was being a bit facetious about the whole thing since Barrick really got the behind in a crack by failing to assess the damage to the down hill water supply. Usually farmers get short shrift when it comes to contamination. If they are protected by the Argentinian government I would suspect ulterior motives from same in the name of the ‘farmers’ Argentina is having some serious inflation, capital flight and economic collapse problems. Maybe they can extract some money from Barrick for their troubles. Forget the farmer’s plight unless it benefits the government.
@SRS nice, thanks.