As one base metals mining executive after another took the stage last week at the TD Securities Mining Conference in Toronto, they knew almost everyone in the audience had the same question: What are you going to do about the balance sheet?
Right now, it’s the only topic that matters. The crash in copper, nickel and zinc prices, which began in 2011 but picked up steam in the past eight months, has torn into miners’ revenues and raised serious concerns about 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 cases, billions) of dollars to build and acquire mines. Now the grim reality of the situation is taking hold, and companies need to take action to avoid disaster.
They have already cut capital spending, laid off employees, slashed production and taken many other measures to preserve liquidity. But more needs to be done, and debt-reduction plans will be the focus when miners start reporting year-end earnings this month.
Some of them could start to trip their debt covenants this year. And, looking ahead, they have large repayments coming due over 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 created equal.
Companies that have revolving credit facilities with banks can usually refinance and extend maturities without too much trouble. But companies with a great deal of public debt, such as Sherritt International Corp. and Thompson Creek Metals Company Inc., could have a tougher time.
“Public debt due in short order 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 in a worst-case scenario. They should be able to find ways to deal with lenders and repair their balance sheets. But shareholders are wondering what kind of pain they will be put through for that to happen.
The share prices of companies such as Sherritt and First Quantum Minerals Ltd., both down about 80 per cent since the start of 2014, and Capstone Mining Corp. (down 88 per cent) suggest investors fear the worst.
“It feels like the equity is kind of a stub and an option value at this point,” said Steve Parsons, another National Bank analyst. “Most people are focused on the debt.”
Regardless, the executives who spoke at the TD conference last Wednesday maintained an upbeat tone. They want nothing more than a metal price recovery to wash these problems away, but they still claim to have plenty of levers to pull to avert catastrophe if prices remain suppressed for a while.
Here’s a look at the balance-sheet situation at seven of the biggest Canadian-based miners.
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 at the end of the third quarter. First Quantum also has about US$5.5 billion of long-term debt, most of which comes due between 2019 and 2022. It had just US$276 million of cash on its balance sheet at the end of September.
First Quantum has a history of good relations with its lenders, and Newall expressed confidence that debt terms can be renegotiated.
Meanwhile, the company is looking at every possible option to reduce leverage, including asset sales and metal stream sales. Newall said the asset sale process should wrap in the next few weeks, but the proceeds may not be huge. For example, First Quantum could sell its nickel assets, but 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 options for its prized Cobre Panama project. He noted that nothing should be off the table if the market keeps weakening.
“Every few weeks, your worst-case model (for metal prices) becomes your base case,” he quipped at the TD conference.
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 debt is due until 2017, and much of it doesn’t come due until 2040 and later.
But while the company is not in danger of tripping covenants, it has more than US$3.5 billion of debt coming due between 2017 and 2023, and it lost its investment-grade credit rating last year.
Teck’s liquidity is weakening because it is plowing $2.9 billion into the Fort Hills oil-sands project just as copper and coal prices collapse. Fort Hills is set to begin production in late 2017, but the project needs to get US$45 a barrel of oil to generate meaningful cash flow. That price still looks a long way off.
Teck has already sold precious metal streams on two of its mines, and chief financial officer Ron Millos said more stream sales are an option. He noted the company has non-core assets it could sell, including stakes in Neptune Bulk Terminals and the Waneta Dam. The company could also sell undeveloped mining assets if necessary.
HudBay is looking to restructure debt by rolling multiple facilities together. But analysts have noted the company may need 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. Given the lack of cash flow coming out of Constancia, that debt may have to be refinanced.
Chief executive Alan Hair said the company could sell streams on gold output at its Constancia and Lalor mines to raise cash, though half of the former’s gold production is already streamed out.
Capstone is fortunate that its debt of $329 million lies in a revolving credit facility with banks. The banks don’t want to run mines and 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 year, but chief financial officer Jim Slattery at the TD conference maintained that the company should be onside.
One unique challenge for Capstone is that its flagship operation is in the U.S., so it doesn’t enjoy the currency benefit that most of its peers are getting. That limits its cash flow.
Taseko has more than $260 million of senior notes coming due in 2019, while a US$30-million secured loan matures this May. Taseko wants to replace the near-term obligation with longer-term debt since its cash position was just $91 million at the end of September.
A further complication is that activist shareholder Raging River Capital LP is preparing to launch a proxy battle in an effort to sever ties between Taseko and the mining group Hunter Dickinson Inc. It is unclear how Raging River’s nominees plan to manage the balance sheet.
Sherritt has more than $2 billion of debt because of its decision build the giant 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. Put simply, this is a very messy situation.
Sherritt has to renegotiate with the Ambatovy lenders (export development agencies), but it also has to repay other loans in order to earn its full share of cash from Ambatovy. Until then, it’s only getting 12 per cent of the cash flow from the mine and has little incentive to put more money in.
In a worst-case scenario, the company could walk away from Ambatovy, effectively abandoning its obligations. Chief executive David Pathe said he is “not sentimental” about losing the project.
Meanwhile, Sherritt has more than $700 million of unsecured debt coming due between 2018 and 2022. Its market cap is only about $200 million.
“Higher nickel prices may be the only means to address (Sherritt’s) situation and this is out of the company’s control,” National Bank analysts said in a note.
This one is nearing an “endgame,” as Credit Suisse analyst Jorge Beristain recently put 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 try to pull off a massively dilutive equity offering. But, in all likelihood, the future of Thompson Creek will be determined by its lenders and by Royal Gold Inc., which owns a gold stream on the company’s Mount Milligan mine.