Imperial Metals dodges liquidity bullet, for now

Troubled miner Imperial Metals (TSX: III) has kicked debt-repayment deadlines further down the road, and will examine strategic alternatives that could include a sale or merger.

Asset sales, joint ventures and a recapitalization are also on the table.

The company says it has already sold a 0.5% net smelter return royalty interest on its Red Chris project for US$17 million. It would only identify the buyer as “a company of which a significant shareholder of the company is a minority equity shareholder.”

Preliminary discussions with a potential joint-venture partner also have taken place, the company says.

In addition, Imperial has taken steps to “rationalize and improve operations at both of the company’s operating mines,” and says the measures, which it did not specify in its Sept. 17 press release, “are expected to have a positive operational impact in the fourth quarter of 2018.”

In the second quarter, Imperial posted an adjusted net loss of $27.8 million (24¢ per share), compared with an adjusted net loss of $21.8 million (23¢ per share) in the comparative quarter of 2017. It also reported a working capital deficiency of $791 million in the three months ended June 30.

Revenue from its Red Chris mine in the June 2018 quarter was $57.3 million, compared with $62.3 million in the second quarter of 2017, while revenue from the Mount Polley mine came in at $22.8 million — half of the $44.1 million it posted in the year-earlier quarter.

The drop in production at Mount Polley was blamed on a strike by unionized workers that began in May, which the company said “resulted in lower production and restricted the ability of the company to record revenue” in the quarter.

In August the company alerted shareholders that it has postponed expenses on some of its capital projects.

On a positive note, however, Imperial has bargained with its credit holders to extend the deadlines on its debt.

Repayment of the company’s $200-million secured revolving senior credit facility has been extended from Oct. 1, 2018, until Feb. 15, 2019, and the deadline for repayment of a second lien credit facility of $50 million has been postponed from Dec. 1, 2018, until Feb. 15, 2019. The credit extensions were guaranteed by Edco Capital Corp. — a company controlled by a significant shareholder of Imperial’s stock.

The deadline for paying back a $26-million bridge loan has been extended from Jan. 5, 2019, until Feb. 28 2019.

“We are thankful to our major shareholders and lenders for supporting the process designed to help us emerge from a very difficult period,” Imperial president and CEO Brian Kynoch stated in prepared remarks, adding that management is “highly confident in the strength and long-term value of our assets.”

Moody’s isn’t so sure and has downgraded the company because its outlook “remains negative.”

“The downgrade reflects Moody’s view that a restructuring is likely to occur in the near future, as most of its debt matures in February and March 2019, leverage is near 10x, and a special committee of the board has been formed to look at all strategic alternatives,” Jamie Koutsoukis, Moody’s vice-president, said in a note.

Imperial Metals is trading at $1.50 per share within a 52-week trading range of 93¢ (August 2018) to $3.76 (October 2017).

The company has 121 million shares outstanding for a $181-million market capitalization.

CIBC mining analysts Oscar Cabrera and Raphael de Souza are keeping their “underperform” rating with a 60¢-per-share target price.

“Imperial’s success in extending the maturities of around 32% of its $863-million debt, while also reducing interest cost and removing covenants for the $200-million credit facility, are positive, preventing a liquidity concern in fourth-quarter 2018,” they wrote in a research note. “However, notwithstanding the deferral of debt maturities, Imperial needs a long-term solution to its balance sheet. We continue to stress that improved operational execution at Red Chris is crucial for the company.”

The Red Chris copper-gold-silver mine, 80 km south of Dease Lake in B.C., entered commercial production on July 1, 2015, but the mine has been dogged by ramp-up problems and lower-than-expected production.

In August 2014, the company’s Mount Polley copper-gold mine near Likely, B.C., suffered a major breach when a glacial lacustrine layer beneath the perimeter embankment of the tailings storage facility collapsed, releasing a slurry of water, tailings and dam construction material into Polley Lake, the Hazeltine and Edney Creeks, and Quesnel Lake.