Barrick Gold’s planned asset write-downs are cutting its net worth by about 40%, leaving the world’s biggest gold miner with a cushion of as little as $4.1-billion before it breaches the terms of a loan.

Barrick’s $4-billion revolving credit facility requires the company to maintain a “con- solidated tangible net worth” of at least $3-billion, according to regulatory filings. The measure was $12.6-billion on March 31, before the Toronto-based company announced impairment charges last month that include as much as $5.5-billion on its Pascua-Lama project, in the Andes.

While Barrick and analysts from Barclays to Royal Bank of Canada say writedowns that may extend to other properties will not trip the covenant requirement, a further plunge in the price of gold, which has dropped more than 25% this year, risks impairing assets that already sport the biggest discount to book value of any North American company with a market value greater than $10-billion.

“If gold prices come down from here, that’s going to be an issue,” says Wen Li, an analyst at debt researcher CreditSights, in New York. “They still have a good amount of headroom at this point in time, but we’ll see.”

Barrick sold $3-billion in bonds in April artly to repay $2-billion in borrowings under its credit facility, which matures in January 2018 and has an interest rate of 120 basis points more than the London interbank offered rate. The company has no financial covenants linked to its public bonds, according to an April 25 regulatory filing.

This leaves the revolver as a key obstacle should Barrick’s tangible net worth deteriorate below the covenant threshold. Apart from the Pascua-Lama write-down of $4.5-billion to $5.5-billion, the company is also likely to take other “significant” impairment charges as it reviews goodwill and other assets, says Barrick. Goodwill, the excess purchase price above the fair market value of acquisitions, is an intangible asset.

“We do not expect to breach the covenant on our undrawn credit facility as a result of impairment charges in the second quarter,” says spokesperson Andy Lloyd.
Barrick may suffer a $592 million write- down on its Jabal Sayid copper project, in Saudi Arabia, as well as a $642 million charge on the Buzwagi mine, in Tanzania, owned by African Barrick Gold plc, which Barrick controls, Royal Bank of Canada analysts led by Stephen Walker wrote in a July 1 report.

“If gold prices remain at current levels or move higher, I don’t think that it’s going to be a very big issue,” Li says. “But if gold prices come down from here, there’s a lot they could potentially write down.”

Gold settled at around $1200/oz last week, down 35% from its record high of $1 921/oz in September 2011. Barrick, whose stock has declined 58% this year to C$14.58 last week, said in April it expected “all-in sustaining costs” to be between $950/oz and $1 050/oz.

The metal is expected to rise to $1 370/oz in the fourth quarter of this year and to average $1 500/oz in 2016, before slipping back to $1 380/oz the following year, according to the median forecast of 28 analysts surveyed by Bloomberg.

Barrick said in a June 28 statement that it was conducting an impairment test at Pascua-Lama after gold and silver prices had dropped and because first production at the project, on the Chile-Argentina border, would be delayed by more than a year to mid-2016. Construction on the Chilean side has been halted since April, after a court accepted an injunction filed by indigenous communities, and Chile’s environmental regu- lator later ordered work to protect water supplies before the project could restart.

The company raised the cost estimate for Pascua-Lama twice last year to as much as $8.5-billion and said first output was scheduled for the second half of 2014. The mine was originally forecast to cost no more than $3-billion when development was approved in 2009.

The impairment follows a decision by Newcrest Mining to write down the value of its properties by as much as A$6-billion ($5.5-billion) as gold companies confront plummeting prices for the metal after spending $195-billion on acquisitions in a decade-long boom.

Credit-default swaps linked to the Canadian miner imply that Barrick is the most susceptible to default in more than four years, according to prices compiled by Bloomberg. The contracts, which pay the buyer face value if a borrower fails to meet its obliga- tions, less the value of the defaulted debt, rose to 361 basis points last week, more than twice what they cost at the end of last year.

“The problem they’re fighting is that gold prices are down significantly,” says Ernie Lalonde, a Toronto-based senior debt analyst at DBRS. “The outlook is for just lower operating cash flows.”

Three acquisitions for $8.4-billion in the last five years helped bring Barrick’s debt load to $14.8-billion on March 31, the biggest among gold miners worldwide, according to data compiled by Bloomberg. The company burned through $1.23-billion of cash in the 12 months to March, the most since 2010.

“It would behoove Barrick to renegotiate this covenant now, before the next set of write-downs and impairments triggered by gold and copper prices, new, higher estimates for the completion of Pascua- Lama and the depressed market value of Barrick’s shares,” says Carol Levenson, director of research at Chicago-based Gimme Credit, which provides advice on fixed- income investments.

Shareholders have endured a more-than $40-billion decline in market value since April 2011, and bond investors now require a 6.35% yield to own Barrick’s $1.5-billion of 4.1% debt due in May 2023, the most of any corporate bond with a similar maturity and rating. Moody’s Investors Service ranks Barrick debt Baa2, two levels above junk and equivalent to the BBB grade from Standard & Poor’s.

“Assuming that they’re in breach, or that they’re about to breach it, they’ll probably go to the banks and ask to renegotiate the covenant,” says Li. “Generally, the company would give up something – they’ll increase the fees, pay a higher coupon, or banks will look to have some sort of collateral for the revolver.”