A Closer Look at Two Long-Term Gold Bonds

gold

In my recent article, “Why Aren’t Gold Bonds Plunging Along With The Stocks?” I mentioned two long-term bonds that have been on my radar screen for quite some time.  For readers who are intrigued by those Barrick Gold and Kinross Gold corporate bonds, I would like to provide a closer look at the terms of the notes.

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Barrick Gold

On April 20, 2012, Barrick Gold filed Form F-10 with the Securities and Exchange Commission, registering its 5.25% coupon, 2042 maturing notes under the Securities Act of 1933.  The registration statement included a preliminary short form prospectus detailing the $750 million of April 1, 2042 maturing senior unsecured notes.  At this time, the notes are rated Baa2/BBB+ by Moody’s and S&P respectively.

Barrick Gold is the world’s largest gold mining company as well as a notable producer of copper.  According to its presentation at the February 25, 2013, “BMO 22nd Global Metals and Mining Conference,” 47% of Barrick’s 2012 production came from North America, 25% from Australia and the Pacific region, 22% from South America, and 6% from Africa.  In terms of proven and probable reserves, in 2012, 42% were in North America, 37% in South America, 12% in Australia and the Pacific region, and 9% in Africa.

The 5.25% coupon, April 1, 2042 maturing, Barrick Gold notes, CUSIP 067901AH1, pay interest semiannually and include both call and put features.  First, there is a make whole call at the “Treasury Rate” plus 30 basis points.  The “Treasury Rate” is defined as follows:

  1. The yield, under the heading that represents the average for the immediately preceding week, appearing in the most recently published statistical release designated “H.I5 (519)” or any successor publication which is published weekly by the Board of Governors of the Federal Reserve System and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption “Treasury Constant Maturities,” for the maturity corresponding to the Comparable Treasury Issue (if no maturity is within three months before or after the Final Maturity Date for the New Notes of such series, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight line basis, rounding to the nearest month), or
  2. If such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.

There is also a conditional call at par (plus accrued and unpaid interest) associated with the notes.  In the prospectus, there is lengthy language detailing this “Tax Redemption” that reads as follows:

  1. As a result of any change (including any announced prospective change) in or amendment to the laws (or any regulations or rulings promulgated thereunder) of Canada (or the jurisdiction of organization of the successor to the Issuer (if outside the United States) or of any political subdivision or taxing authority thereof or therein affecting taxation, or any change in official position regarding the application or interpretation of such laws, regulations or rulings (including a holding by a court of competent jurisdiction), which change or amendment is announced or becomes effective on or after the date of this prospectus, and which in a written opinion to the Issuer of legal counsel of recognized standing has resulted or will result (assuming, in the case of any announced prospective change, that such announced change will become effective as of the date specified in such announcement and in the form announced) in the Issuer becoming obligated to pay, on the next succeeding date on which interest is due, Additional Amounts with respect to any New Note of such series as described under “– Payment of Additional Amounts”; or
  2. On or after the date of this prospectus, any action has been taken by any taxing authority of, or any decision has been rendered by a court of competent jurisdiction in, Canada (or the jurisdiction of organization of the successor to the Issuer (if outside the United States)) or any political subdivision or taxing authority thereof or therein, including any of those actions specified in the paragraph immediately above, whether or not such action was taken or decision was rendered with respect to the Issuer, or any change, amendment, application or interpretation shall be officially proposed, which, in any such case, in the written opinion to the Issuer of legal counsel of recognized standing, will result (assuming, in the case of any announced prospective change, that such announced change will become effective as of the date specified in such announcement and in the form announced) in the Issuer becoming obligated to pay, on the next succeeding date on which interest is due, Additional Amounts with respect to any New Note of such series.

Moreover, there is a conditional put at 101 cents on the dollar for a change of control repurchase event.  The preliminary short form prospectus found in Form F-10 (linked above) provides very specific language for determining both the change of control event and the ratings event that must occur for the conditional put to take place.

Another piece of important information is that the 2042 notes are not guaranteed by Barrick Gold’s subsidiaries.  They are, instead, exclusively the obligation of Barrick Gold itself.  This, according to the prospectus, means the notes are effectively “subordinated to all existing and future liabilities” of the subsidiaries.”  Furthermore, “In the event of an insolvency, liquidation or other reorganization of any such subsidiaries, Barrick’s creditors will have no right to proceed against the assets of such subsidiaries.”

Additionally, if you are curious about covenants related to limitation on liens as well as consolidation, amalgamation, and mergers, the aforementioned preliminary prospectus provides further details.

In recent days, I have seen offer prices for the notes generally fluctuating between 98.40 and 101.  On April 24, 2013, I finally purchased CUSIP 067901AH1.

Kinross Gold

Kinross Gold is a gold-focused mining company with operations centered in four parts of the world: North America, South America, western Africa, and eastern Russia.  Its September 1, 2041 maturing, 6.875% coupon senior unsecured notes, CUSIP 496902AK3, pay interest semiannually and are currently rated Baa3/BBB- by Moody’s and S&P respectively.  There are only $250 million of the notes outstanding, and while they pretty consistently have offers available on the secondary market, actual trading in the notes is sporadic.  At the time this article was written, the notes were being offered for 104.917 cents on the dollar, a yield-to-par-call of 6.49%.

As with the previously described Barrick Gold notes, you should be aware of various features associated with the Kinross Gold notes.  The preliminary short form prospectus can be found here.

First, the Kinross Gold 2041 maturing notes do have a subsidiary guarantee for all subsidiaries that take part in the company’s Credit Agreement.  According to the prospectus, “Credit Agreement” means “the Fourth Amended and Restated Credit Agreement, dated as of March 31, 2011, among Kinross Gold Corporation, Kinross Gold U.S.A., Inc., Round Mountain Gold Corporation and Kinross Brasil Minercaçao S.A., the lending institutions named therein and The Bank of Nova Scotia, as administrative agent, as amended, extended, renewed, restated, supplemented, refunded, replaced or otherwise modified from time to time by one or more credit facilities, and any agreement entered into in substitution therefor.”

Furthermore, there is a make whole call at the “Treasury Rate” plus 50 basis points.  The make whole call expires on the last day of February 2041.  On or after March 1, 2041, the notes can be called at par.  There is also a change of control repurchase event tied to the Kinross Gold notes.  Should a change of control repurchase event occur, the repurchase price will be 101 cents on the dollar.  Moreover, as with the Barrick Gold notes, there is a conditional call referred to as a “Tax Redemption.”  If called under the terms of the “Tax Redemption,” the call price is 100 cents on the dollar.  In general, the terms of the two “Tax Redemptions” are similar in nature.  But I would still recommend reading the language in the Kinross Gold prospectus, as the wording is different from that in Barrick Gold’s prospectus.

Before purchasing either of the notes detailed in this article, please remember to do your own due diligence on the financial profiles of Barrick Gold and Kinross Gold.  Only you can determine if taking the counterparty risk of buying individual bonds is right for you.  Additionally, only you can determine if taking the duration risk of buying long-term bonds is suitable for your portfolio.  Finally, please review the prospectus of both notes, as there may be additional details important to you that were not mentioned in this article.

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