Red Chris delay sends Imperial back to the market

In danger of breaking a loan covenant because of a slow ramp-up at its Red Chris copper-gold mine in northwestern B.C., Imperial Metals (TSX: III; US-OTC: IPMLF) is turning once again to its largest shareholders for financial help.

One of the clauses under a $200-million senior credit facility for Imperial’s Red Chris stipulated that the mine would reach commercial production by June 1. However, lack of water caused by a late spring runoff has delayed plant commissioning by a month, and the company needs more funds to see it through to commercial production. First production was achieved in February.

Oilsands financier N. Murray Edwards, who controls 36% of Imperial’s shares, has agreed to give the company a short-term, $30-million loan bearing 12% interest through Edco Capital Corp. Imperial is planning an $80-million rights offering to repay the Edco loan — which is due in six months — to support the Red Chris ramp-up, and advance its Mount Polley mine back to production.

Terms of the rights offering have not been announced, besides including units comprised of common shares and convertible debentures. But before it can proceed, the company needs to extend the completion requirement for Red Chris from its creditors.

The news — combined with a $33.4-million first-quarter loss reported on May 15 — sent Imperial shares down 14.7% over three trading days.

Production at the company’s Mount Polley copper-gold mine has been suspended since last August, when a tailings dam breach sent 25 million cubic metres of mine waste and water into Polley Lake and Quesnel Lake. Imperial’s revenues in the first quarter amounted to only $1.5 million, compared with $51.3 million in last year’s comparable quarter.

However, M Partners’ analyst Derek Macpherson writes in a note that “with the completion of the rights offering, we believe Imperial is likely to have sufficient capital to get Red Chris to positive cash flow.” The analyst upgraded Imperial to a “hold” rating from “under review,” and has put a one-year, $13.50 target on the stock.

Edco and Fairholme Capital Management, which holds nearly 17% of the company’s shares, have agreed to backstop the $80-million rights offering. The shareholders previously bought the lion’s share ($40 million each) of a $100-million convertible debt offering last year that Imperial has used in its cleanup effort at Mount Polley, and to finish building Red Chris.

Imperial also secured a $50-million credit facility in January — guaranteed by Edco — which was meant to provide more liquidity for Red Chris’ startup.

Aside from a temporary lack of water at Red Chris, Imperial has also struggled with lower-than-projected copper recoveries. The mill has so far recovered less than 60% of the copper in ore, falling short of the 86% expected. The company is working to achieve a finer grind to improve recoveries.

The mill had an average 20,000-tonne-per-day throughput in March, against 30,000 tonnes in design throughput.

At Mount Polley in central B.C., Imperial has reported remediation progress, with all major earth moving in the remediation of Hazeltine Creek completed.

The company hopes to restart Mount Polley after applying for a temporary restart permit in January. The plan would see tailings temporarily deposited in the Springer pit at the operation. The company would eventually reopen the Mount Polley tailings pond.

Imperial shares closed at $10.93. They traded in a 52-week window of $7.30 to $17.22 at press time. The company has 75 million shares outstanding.