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TORONTO – First Quantum Minerals Ltd. warned there is “significant doubt” it may continue like a going concern because the company struggles to handle 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 conserve a net debt-to-EBITDA ratio of less than 5.Five times to avoid a breach in first 1 / 2 of 2016, and less than 4.5 times within the second half. In 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 using its lenders and is spending so much time to fix its balance sheet. The company had more than US$4.6 billion of debt after 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.
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The company renegotiated the web debt-to-EBITDA covenant with lenders this past year, but continues to be at risk of tripping it. Recently, Newall expressed confidence that debt terms can be renegotiated again.
First Quantum intends to reduce its net debt by a lot more than US$1 billion by the end of the very 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 are a black cloud within the company.
Analysts weren’t happy to begin 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 proven fact that management was unable to arrived at an agreement using its lenders to modify or waive the covenants prior to the issuance of the (year-end) fiscal reports is disappointing,” TD Securities analyst Greg Barnes said inside a note.
“However, assuming the company’s asset-sale process works 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 may happen as soon as 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 offer gave First Quantum the US$5.5-billion Cobre Panama project, and it has been plowing borrowed money into growth and development of the mine. Meanwhile, copper and nickel prices have collapsed and First Quantum’s income is far lower than management expected once 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 your fourth quarter, aided by copper hedging gains. Adjusted earnings of US$190 million, or US28 cents a share, were better than analysts expected.
Financial Post
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