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The bond market rout is sending shock waves through the corporate credit market, but mining companies are taking a particularly hard beating as commodity prices tumble.
Corporate and government bond prices have fallen sharply since the Federal Reserve last week said it could pull back on its extraordinary bond buying program. Now commodity prices are extending their slide, creating an added level of anxiety among investors in bonds issued by some mining companies.
The price of gold plummeted about $45 to about $1,230 (U.S.) an ounce Wednesday, and earlier this week, the price of copper briefly broke through the important psychological barrier of $3 a pound. At these prices, some development projects are much less economic and miners make less money for each pound or ounce of metal they sell.
Falling bond prices in the mining sector are troublesome because many miners flocked to the bond market for refuge. Amidst massive cost overruns, multibillion-dollar writedowns and weakening commodity prices, many mining stocks fell more than 40 per cent in the past year, making it difficult for them to raise cash by selling new shares.
To fill the financing hole, miners raised $113-billion by selling new bonds in 2012, up from about $80-billion the year prior, according to Ernst & Young, and that trend had continued this year. Barrick Gold Corp. sold $3-billion worth of new debt in April and Goldcorp Inc. tapped investors for $1.5-billion in March.
But now the market is at a standstill as investors wait on the sidelines to see if the rout drags on. Both Barrick and Goldcorp’s 10-year bonds issued earlier this are down roughly 12 per cent in just a few months.
With such uncertainty in the market, Susan Rimmer, managing director of debt capital markets at Canadian Imperial Bank of Commerce, said investors are now conducting some due diligence by reviewing the “price decks” put out by rating agencies, which estimate cash flows at different commodity prices.
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