As one base metals mining executive after another took happens last week in the TD Securities Mining Conference in Toronto, they knew almost everyone within the audience had exactly the same question: What exactly are you likely to do concerning the balance sheet?
Right now, it’s the only topic that means something. The crash in copper, nickel and zinc prices, which began this year but picked up steam in the past eight months, has torn into miners’ revenues and raised serious concerns regarding their ability to repay debt.
Canada’s biggest base metal miners assumed they would enjoy long-term metal prices far above current levels when they borrowed hundreds of millions (in some instances, billions) of dollars to build and get mines. The grim reality from the situation is taking hold, and firms need to take action to prevent disaster.
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They have previously cut capital spending, let go employees, slashed production and taken many other measures to preserve liquidity. But more needs to be done, and debt-reduction plans would be the focus when miners start reporting year-end earnings this month.
Some of them could start to trip their debt covenants this season. And, looking ahead, they have large repayments coming due within the next several years that look impossible to meet at current metal prices without a major refinancing or restructuring.
Of course, not all debt is made the same.
Companies which have revolving credit facilities with banks can usually refinance and extend maturities without too much trouble. But companies having a lot of public debt, such as Sherritt International Corp. and Thompson Creek Metals Company Inc., will have a tougher time.
“Public debt due quickly here is going to be problematic,” said Shane Nagle, an analyst at National Bank.
It is unlikely that any of these companies will be forced into creditor protection, even just in a worst-case scenario. They should be able to find ways to cope with lenders and repair their balance sheets. But shareholders are pondering what kind of pain they will be put through for that to occur.
The share prices of companies such as Sherritt and First Quantum Minerals Ltd., both down about 80 per cent because the oncoming of 2014, and Capstone Mining Corp. (down 88 per cent) suggest investors fear the worst.
“It feels like the equity is a stub as well as an option value at this point,” said Steve Parsons, another National Bank analyst. “Most individuals are focused on your debt.”
Regardless, the executives who spoke at the TD conference last Wednesday maintained an upbeat tone. They want simply a metal price recovery to clean these problems away, however they still claim to have ample levers to pull to avert catastrophe if prices remain suppressed for some time.
Here’s phone balance-sheet situation at seven of the biggest Canadian-based miners.
FIRST QUANTUM MINERALS LTD
First Quantum, the former darling of the copper industry, is now the poster child for excess leverage.
Co-founder and president Clive Newall said the company is poised to breach a debt covenant after the 3rd quarter. First Quantum also offers about US$5.5 billion of long-term debt, many of which comes due between 2019 and 2022. It had just US$276 million of cash on its balance sheet after September.
First Quantum has a history of good relations using its lenders, and Newall expressed confidence that debt terms could be renegotiated.
Meanwhile, the company looks at each possible choice to reduce leverage, including asset sales and metal stream sales. Newall said the asset sale process should wrap within the next few weeks, but the proceeds may not be huge. For instance, First Quantum could sell its nickel assets, however this is a buyer’s market for nickel.
Every few weeks, your worst-case model (for metal prices) becomes your base case,
As a last-ditch option, Newall said the company could explore choices for its prized Cobre Panama project. He noted that nothing should be from the table if the market keeps weakening.
“Every couple weeks, your worst-case model (for metal prices) becomes your base case,” he quipped at the TD conference.
TECK RESOURCES LTD
Canada’s largest diversified miner is in a better position than some of its rivals since its $9.2-billion debt load is spread out over decades. None of its debts are due until 2017, and far from it doesn’t come due until 2040 and then.
But as the company is not at risk of tripping covenants, it’s a lot more than US$3.5 billion of debt coming due between 2017 and 2023, also it lost its investment-grade credit score last year.
Teck’s liquidity is weakening because it is plowing $2.9 billion into the Fort Hills oil-sands project just like copper and coal prices collapse. Fort Hills is placed to begin production at the end of 2017, however the project must get US$45 a barrel of oil to create meaningful cash flow. That price still looks quite a distance off.
Teck has already sold rare metal streams on a couple of its mines, and chief financial officer Ron Millos said more stream sales are a choice. He noted the company has non-core assets it could sell, including stakes in Neptune Bulk Terminals and also the Waneta Dam. The company may also sell undeveloped mining assets if required.
HUDBAY MINERALS INC
HudBay looks to restructure debt by rolling multiple facilities together. But analysts have noted the company may require covenant relief this year if nothing changes.
Meanwhile, HudBay has more than US$900 million of debt coming due in 2020, which it issued in order to build the Constancia copper mine in Peru. Because of the lack of income appearing out of Constancia, that debt might have to be refinanced.
Chief executive Alan Hair said the organization could sell streams on gold output at its Constancia and Lalor mines to raise cash, though 1 / 2 of the former’s gold production has already been streamed out.
CAPSTONE MINING CORP
Capstone is fortunate that its debt of $329 million is based on a revolving credit facility with banks. The banks don’t wish to run mines and really should be keen to refinance it as required. As it stands, repayment is due in 2019.
Some investors have raised concerns that Capstone will breach debt covenants this season, but chief financial officer Jim Slattery at the TD conference maintained the company ought to be onside.
One unique challenge for Capstone is that its flagship operation is incorporated in the U.S., so it doesn’t benefit from the currency benefit that most of their peers are getting. That limits its cash flow.
TASEKO MINES LTD.
Taseko has a lot more than $260 million of senior notes coming due in 2019. Positively, the organization recently entered a US$70 million credit facility agreement, letting it repay a US$30 million loan that was coming due in May of this year. The brand new facility also matures in 2019.
A further complication for Taseko is the fact that activist shareholder Raging River Capital LP is preparing to launch a proxy battle in order to sever ties between the company and also the mining group Hunter Dickinson Inc. It is unclear how Raging River’s nominees intend to manage the total amount sheet.
SHERRITT INTERNATIONAL CORP
Sherritt has more than $2 billion of debt because of its decision build the large US$5.3-billion Ambatovy mine in Madagascar. At current nickel prices, that mine can’t generate nearly enough cash to make semi-annual payments to lenders. Quite simply, this is a very messy situation.
Sherritt has to renegotiate with the Ambatovy lenders (export development agencies), but it also needs to repay other loans to be able to earn its full share of money from Ambatovy. Until then, it’s only getting 12 percent from the cash flow from the mine and it has little incentive to put more money in.
In a worst-case scenario, the company could leave behind Ambatovy, effectively abandoning its obligations. Leader David Pathe said he is “not sentimental” about losing the work.
Meanwhile, Sherritt has more than $700 million of personal debt coming due between 2018 and 2022. Its market cap is only about $200 million.
“Higher nickel prices could be the only way to address (Sherritt’s) situation and this is from the company’s control,” National Bank analysts said in a note.
THOMPSON CREEK METALS COMPANY INC
This one is nearing an “endgame,” as Credit Suisse analyst Jorge Beristain recently place it. Thompson Creek has more than US$800 million of debt maturing between 2017 and 2019, including more than US$300 million next year.
The miner may attempt to pull off a massively dilutive equity offering. But, in all likelihood, the future of Thompson Creek is decided by its lenders and by Royal Gold Inc., which owns a gold stream on the company’s Mount Milligan mine.
pkoven@nationalpost.com
Twitter.com/peterkoven
