TORONTO — First Quantum Minerals Ltd. warned there is “significant doubt” it can continue as a going concern as the company struggles to manage a massive debt load amid very weak base metal prices.
The Toronto-based copper miner made the disclosure Thursday night because it is in danger of breaching a key debt covenant. It needs to maintain a net debt-to-EBITDA ratio of less than 5.5 times to avoid a breach in first half of 2016, and less than 4.5 times in the second half. By comparison, Dundee Capital Markets analyst Joseph Gallucci estimated the ratio was 6.3 times at the end of 2015.
On Friday, First Quantum President Clive Newall tried to downplay the risk to shareholders. He noted that First Quantum has good relations with its lenders and is working hard to fix 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 cash.
“It is important for you to remember that our secured lenders remain supportive and encouraged by the actions we are taking,” he told investors on a conference call.
The company renegotiated the net debt-to-EBITDA covenant with lenders last year, but is still at risk of tripping it.
First Quantum plans to reduce its net debt by 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 could dissipate. For now, they are a massive 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 by it.
“The fact that management was unable to come to an arrangement with its lenders to modify or waive the covenants before the issuance of the (year-end) financial statements is disappointing,” TD Securities analyst Greg Barnes said in a note.
“However, assuming the company’s asset-sale process is successful along with cost-reduction plans… we expect that the company’s lenders should be co-operative.”
Gallucci said a covenant breach is “very likely” and could happen as soon as the second quarter.
Meanwhile, First Quantum has significant debt repayments coming due in 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 because of its $4.9-billion takeover of Inmet Mining Corp. in 2013, which was partly funded by cash. The deal gave First Quantum the US$5.5-billion Cobre Panama project, and it has been plowing borrowed money into development of the mine. Meanwhile, copper and nickel prices have collapsed and First Quantum’s cash flow is far lower 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 per cent from the initial level. It also delivered solid financial results in the fourth quarter, partly due to copper hedging gains. Adjusted earnings of US$190 million, or US28 cents a share, were better than analysts expected.