New-look Barrick has some rough edges

RATINGS agency Fitch says the October decision by gold leader Barrick Gold to buy Africa-focused Randgold Resources bodes well for the company, but a lower gold price could hamper necessary efforts to rein in high debt and lift profit margins.
New-look Barrick has some rough edges New-look Barrick has some rough edges New-look Barrick has some rough edges New-look Barrick has some rough edges New-look Barrick has some rough edges

Fitch says the 'new Barrick Gold' will be a 'far from perfect' market leader

Henry Lazenby

The US$6 billion merger to create the world's largest gold miner is far from perfect, with the credit rating firm saying asset divestment and mothballing could curb production growth after a fall from 5.3 million ounces in 2017 to 4.5-5Moz this year.

Fitch also said despite the company having made a significant dent in the debt on its balance sheet over recent years, it remained high at $6.4 billion as at the first quarter of 2018, a figure the company planned to reduce to $5 billion by year-end.

The outlook also remains clouded by the uncertainty regarding the future of the stalled multi-billion-dollar Pascua-Lama copper-gold project, which the company again shelved in April.

Several legal, regulatory and permitting issues remained unresolved, but the company was believed to be evaluating the use of underground mining methods for a starter project on the Argentine side of the border-straddling mine, which could result in the beginning of project development, Fitch said.

Fitch considered the Veladero mine, also in Argentina, as both a weakness and a threat for Barrick. Early in 2016 the company was fined $9.8 million and nine current and former employees were criminally charged over a cyanide spill at the mine in September 2015.

The miner is also vulnerable to potentially stricter mining regulations, such as in Argentina, following the cyanide spill. It had resulted in operations at the mine being temporarily suspended because of environmental infractions.

The threat that negotiations with the Tanzania government break down regarding a gold concentrate export ban also weighs on the outlook of the new major and could impact revenues. Barrick owns 64% of Acacia Mining, whose two gold mines in Tanzania accounted for about 12% of revenue, according to Fitch.

However, on the plus side, a rising gold price could push profit margins higher and support more organic growth, the agency said. Fitch sees the gold price ending 2018 at $1300/oz and in 2019 at $1325/oz.

Despite needing to get the balance right between capital management and production growth, Fitch also sees Barrick as a sector heavweight with the financial muscle to lead consolidation moves and develop project partnerships that could improve its overall risk profile.

Barrick's partnership with Cisco Systems signed in 2016 could also contribute to efforts to improve costs through effectve application of technology.

Strong exposure to stable developed markets in US and Canada, and diversified production across emerging markets in Africa and Latin America, gave Barrick a diversified production profile and the sector's largest proven and probable gold reserve base at 85.9Moz, with an average reserve grade of 1.32 grams per tonne.

Randgold shares will cease trading today with the merger to take effect tomorrow.