TORONTO – First Quantum Minerals Ltd. warned there’s “significant doubt” it may continue as a going concern because the company struggles to manage an enormous debt load amid very weak base metal prices.
The Toronto-based copper miner made the disclosure Thursday night since it is in danger of breaching a key debt covenant. It needs to maintain a net debt-to-EBITDA ratio of under 5.Five times to avoid a breach in first half of 2016, and fewer than 4.5 times in the second half. By comparison, Dundee Capital Markets analyst Joseph Gallucci estimated the ratio was 6.3 times after 2015.
On Friday, First Quantum President Clive Newall downplayed the danger to shareholders. He noted that First Quantum has good relations with its lenders and it is working hard to repair its balance sheet. The company had more than US$4.6 billion of debt at the end of December, compared to US$365 million of money.
“It is important that you should remember that our secured lenders remain supportive and encouraged through the actions we’re taking,” he told investors on a business call.
Related
- Debt risks mount as Canada’s base metal miners sink deep in the holeHow First Quantum Minerals Ltd raised $1.44B, the biggest base metals equity offering since 2007
-
-
-
The company renegotiated the web debt-to-EBITDA covenant with lenders last year, but continues to be vulnerable to tripping it. Last month, Newall expressed confidence your debt terms can be renegotiated again.
First Quantum plans to reduce its net debt by a lot more than US$1 billion by the end of the first quarter through asset sales and other means. If those measures are successful and metal prices recover, concerns about the balance sheet should dissipate. For the time being, they’re a black cloud over the company.
Analysts were not happy to see the “going concern” warning, which First Quantum revealed in disclosure tied to its its fourth quarter earnings. However, they were not shocked because of it.
“The fact that management was not able to come to an agreement using its lenders to modify or waive the covenants prior to the issuance from the (year-end) financial statements is disappointing,” TD Securities analyst Greg Barnes said inside a note.
“However, assuming the company’s asset-sale process is successful along with cost-reduction plans- we expect the company’s lenders ought to be co-operative.”
Gallucci said a covenant breach is “very likely” and could happen when the second quarter.
Meanwhile, First Quantum has significant debt repayments coming due within the years ahead, including about US$1.1 billion in 2020, US$1.1 billion in 2021, and US$839 million in 2022.
The company became over-levered due to its $4.9-billion takeover of Inmet Mining Corp. in 2013, that was partly funded by cash. The deal gave First Quantum the US$5.5-billion Cobre Panama project, and contains been plowing borrowed money into growth and development of the mine. Meanwhile, copper and nickel prices have collapsed and First Quantum’s income is way less than management expected when they decided to buy Inmet.
On the positive side, First Quantum has chopped the estimated construction cost at Cobre Panama by 15 percent in the initial level. It also delivered solid financial results in your fourth quarter, partly due to copper hedging gains. Adjusted earnings of US$190 million, or US28 cents a share, were better than analysts expected.
Financial Post
pkoven@postmedia.com
Twitter.com/peterkoven
