S&P Raises Outlook on Barrick Gold (ABX) to Positive; Ratings Affirmed
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S&P Global Ratings said it revised its outlook on Barrick Gold Corp. (NYSE: ABX) to positive from stable. At the same time, S&P Global Ratings affirmed its 'BBB-' long-term corporate credit and issue-level ratings on the company as well as its 'A-3' short-term rating on Barrick's commercial paper.
"The outlook revision to positive follows the increase in our gold price assumptions through 2018, and also takes into account Barrick's improving cost profile and commitment to future deleveraging," said S&P Global Ratings credit analyst Jarrett Bilous.
We estimate the company will generate credit measures that are considered strong for the current rating over the next two years, including adjusted debt-to-EBITDA in the mid-2x area. The outlook also incorporates our expectation for volatility in gold prices, which are not far removed from cycle-lows at year-end 2015. However, we believe a continuing favorable gold price environment and improvement in Barrick's cost position should translate into free cash flow and debt repayment above our previous expectations. As such, we believe there is an increased likelihood that Barrick will achieve a stronger financial risk profile and one-notch upgrade on the company within the next one to two years.
We consider Barrick's business risk profile to be at the higher end of our satisfactory assessment primarily due to the relative strength of the company's operating breadth and cost position.
Barrick is the world's largest gold producer, with 11 gold mines (wholly or partially owned) and more than 90 million ounces in proven and probable reserves that provide long-term production visibility. The company's operations are well-diversified by geography and scale, with comparable annual output from its five core mines. Barrick's business risk assessment also takes into account the potential volatility of its profitability, which is sensitive to fluctuating gold prices. In addition, the company lacks material commodity diversification, particularly relative to higher-rated global mining peers, and remains exposed to elevated country risk at certain of its mines. Furthermore, while Barrick has significant growth opportunities, we expect limited contributions from planned development projects in the next few years.
We view Barrick's financial risk profile as significant, but we consider its prospective credit ratios strong for this assessment.
The positive outlook follows the increase in our gold price assumptions through 2018, and also takes into account Barrick's improving cost profile and commitment to future deleveraging. We estimate the company will generate credit measures that are considered strong for the current rating over the next two years, including adjusted debt-to-EBITDA in the mid-2x area, but expect gold price volatility to persist over this period.
We could revise the outlook to stable if we expect Barrick to generate and sustain an adjusted debt-to-EBITDA ratio of about 3x. In this scenario, we would expect the company to realize gold prices below our current assumptions or generate cash costs materially above our estimates, with no change in our view of its business risk profile.
We could upgrade Barrick if we believe the company can maintain a financial risk assessment that we consider firmly within the intermediate category, including adjusted debt-to-EBITDA in the mid-2x area, over the next two years. In this scenario, we would expect average gold prices roughly in line with our assumptions over this period, with relatively stable cash costs and an improving net debt position.
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