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COMMENT: Barrick seeks to raise $3B with equity offering

Why is it said that bad things come in threes?


Why is it said that bad things come in threes?

Take a look at the (mis)fortunes of Barrick Gold since last Thursday.

First, the company announced it has ceased construction at the $8.5-billion Pascua Lama gold project on the Chile-Argentina border.

Second, Q3 net earnings were a meager $170 million. Compared to $650 million for the same quarter a year ago, that is a fall of 74% due to lower gold and copper prices, rising interest rates and income taxes. Even when Q3 net earnings were adjusted, they were off 34% from a year earlier.

Third, the company announced after markets closed on Nov. 1 its plan to reduce debt by making a $3-billion public equity offering.

And fourth, a double-whammy share price slide of 6% on Thursday and a further 7% on Friday. By Monday afternoon the share price hung at $18.93.

That’s not three, it’s four bad things happening to Barrick – poor Q3 earnings, shelving of its flagship project, a shrinking share price, and the need to issue shares to pay down debt.

The decision to halt construction at Pascua-Lama was discussed in CMJ’s Daily News Headline of Oct. 31. The project has become something of a problem as costs skyrocket and support from the Chilean government and local communities plummets. The nearly 18 million oz of gold in the ground is not going anywhere soon. Hence a 6% drop in the share prices.

Then came the public offering. Barrick entered into a syndicated underwriting agreement to issue 163.5 million common share at a price of $18.35 per share. Net proceeds will be $2.9 billion. And there is an overallotment option that, if exercised, will bring Barrick’s total proceeds up to $3.3 billion. The company says it intends to use the net proceeds to “strengthen its balance sheet and improve the long term liquidity position of the company.”

Barrick currently has approximately 1.0 billion shares outstanding, and the offering will bring that number up to $1.19 billion shares if the overallotment is exercised in full. Investors cannot be too pleased by the news, as the Friday share price drop of 7% indicates.

The chattering classes are weighing in with their opinions. Some analysts are saying the equity offering is going to be a hard sell. Other are calling for the resignation of founder and co-chairman Peter Munk. Still others want the company broken up.

Time will tell how the Barrick story plays out. Booting the management is not a panacea (ask Blackberry founders Mike Lazaridis and Jim Balsillie who were turfed out in early 2012 in favour of CEO Thorsten Heins who lost his job today). It is premature to think the company will become unrecognizable or disappear. These are tough times for a world-beating gold miner, but the assets are sound and the company will move forward.


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