Gold miners struggle to recover

Gold miners were among the strongest performers today, though they have considerable ground to make up for the damage wrought in recent weeks.

Their fortunes are obviously tied to the price of gold, which increased today to $1,420 an ounce. However, this is nowhere near the $1,600 seen at the beginning of this month and the CDS spreads of the miners are also significantly wider than where they were a few weeks ago.

One miner, in particular, stands out as a notable underperformer. Barrick Gold's spreads widened from 155bps to nearly 220bps in the space of a week. They have recovered slightly to 205bps today, but this is still about 70bps wider than where they started the year.

The plummeting price of gold has clearly hurt Barrick, along with other miners. However, it also has problems peculiar to the company that help explain why it has lagged the rest of the sector. Barrick has a large debt burden, mainly as a result of ill-advised acquisitions, and its leverage is high for an investment-grade credit. The recent widening means that it has an implied rating of 'BB', according to Markit data.

Perhaps the biggest issue is the uncertain fate of the Pascua-Lama development project on the border of Argentina and Chile. The spirallingy cost of the project has inflicted serious damage to Barrick's credit standing, and it received a further setback earlier this month when a Chilean court ordered the company to halt construction, citing allegations of environmental damage.

Barrick's underperformance is probably attributable - at least in part - to the Pascua-Lama news. Of course, if the price of gold recovers to its former glory, investors may give the firm the benefit of the doubt. If that doesn't materialise, then Barrick's cash flow will come under pressure and its spreads will likely remain at sub-investment grade levels.

Elsewhere, the broader credit market was relatively solid, and held up well compared to equities. The Markit iTraxx Europe was 2.5bps tighter at 111bps, driven by banks and commodity names.

Earnings season will be an important influence this week, with mining equipment maker Caterpillar's below-par results today a worrying sign for the global economy. Markit flash PMIs scheduled for release tomorrow will also be closely watched.

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