Imperial balances start-up and cleanup

Imperial Metals (TSX: III; US-OTC: IPMLF) has estimated cleanup costs related to the early August tailings dam failure at its Mount Polley mine at $67.4 million — less than many analysts had expected.

The company revealed in its third-quarter results that it had spent $20.3 million on the initial response to the tailings spill at the copper-gold mine, 100 km northeast of Williams Lake, B.C., with another $47.1 million recorded for expected rehabilitation and restoration costs, primarily over the next nine months.

“That’s our estimate for the total cost,” Imperial president Brian Kynoch said on a conference call. “Of course, there could always be another provision … we’re not finished. We haven’t made all the arrangements for how we’re going to complete the rehabilitation of the creek, but that is our best estimate.”

A tailings dam breach on Aug. 4 at Mount Polley sent millions of cubic metres of tailings into the Quesnel Lake watershed. Production at the mine has been suspended ever since.

The company has completed much of the initial work that needs to be done before rehabilitation can take place, including securing the tailings by building an upstream dyke, reducing the water level in Polley Lake to normal levels and removing woody debris from Quesnel Lake (ongoing).

Current rehabilitation efforts are focused on the lower third of Hazeltine Creek: much of the work is focused on stabilizing the banks of the creek so they won’t erode with spring runoff in the first half of 2015.

Gary Lampard, a mining analyst at Canaccord Genuity, had estimated cleanup costs at around $250 million (a figure he’s now reduced to $100 million), while M Partners’ Derek Macpherson had pegged costs at $90 million.

“Overall, we continue to model cleanup costs of $90 million,” Macpherson wrote in a client note. “While we view this as an initial cleanup cost estimate, we believe it provides clarity on the likely magnitude of these costs, consequently reducing risk.”

An expert review panel, appointed by the provincial government, is investigating the causes of the tailings dam failure. Geotechnical work to that end, which includes mapping, geophysical surveys, drilling and test pitting, was slated to wrap up in November. The panel’s report is expected before the end of January.

On the conference call, Kynoch said the company is studying options to reopen Mount Polley, including temporarily holding tailings in the Springer pit to allow for a restart as tailings dam repairs are completed.

Red Chris

While Imperial cleans up, it’s also working to commission its Red Chris copper-gold mine — 80 km south of Dease Lake in northwest B.C. — in December. Commercial production at the 30,000-tonne-per-day, open-pit operation is expected to follow in March or April.

The $643-million mine (capital costs have increased slightly from $631 million) is essentially complete. The site is being hooked up to the power grid, with the Iskut extension of the Northwest Transmission Line from Bob Quinn having been completed by the company in October. Over its first five years of production, Red Chris is expected to average 88 million lb. copper and 52,700 oz. gold per year.

Before it can start operations, however, Imperial will need an environmental permit to discharge tailings, something it expects to receive in December. In addition, a third-party tailings dam review completed on behalf of the Tahltan First Nation has generated more than a dozen recommendations, mostly having to do with environmental monitoring.

Imperial is working with the Tahltan on implementing those recommendations, as well as finalizing an impact benefit agreement with the Tahltan.

The company expects to receive $52 million in December, related to sale of the Iskut power line extension to BC Hydro.

But Canaccord’s Lampard notes that the company could experience a cash crunch if payment from BC Hydro or its timeline at Red Chris are delayed.

At the end of September, Imperial had $18.1 million in cash (in mid-November its cash position had shrunk to less than $10 million), plus $60 million in available credit.

Lampard, who assumes in his valuation that Mount Polley will not reopen, has a “speculative buy” rating on Imperial and raised his target to $11.50 from $10.50 on the update.

“While risks are in our view diminishing, we still do not know the cause to the Mount Polley tailings dam failure, and Red Chris start-up remains vulnerable to continued delay. We note the potential need for additional funding, but point to Imperial’s history of shareholder support when required.”

To help pay for remediation at Mout Polley and to finish work and commissioning at Red Chris, the company completed a $115-million convertible debenture financing in September.

M Partners’ Macpherson has a “hold” recommendation on Imperial and an $8.50 target price.

“We are encouraged by both the completion of the power line at Red Chris, allowing for dry commissioning at this time, and the initial cleanup estimates at Mt. Polley, which at $67.4 million is below our $90-million estimate,” Macpherson wrote in a note.

“However, the company has been consuming cash faster than we previously modelled and now has limited financial flexibility. As a result, our estimates suggest it is now critical for Red Chris to deliver cash flow in second-quarter 2015, and that the company receive the expected payment of $52 million from BC Hydro in Q1 2015, otherwise additional capital is likely required. The key risk remains the outstanding permit at Red Chris to allow the company to discharge tailings into the tailings facility.”

Imperial shares recently traded at $9.16 in a 52-week range of $7.92 to $18.63. The company has 75 million shares outstanding.

Aside from Mount Polley and Red Chris, the company also owns half of the Huckleberry mine in B.C., as well as the small Sterling mine in Nevada, which is in the permitting process for a three-year open-pit operation.

Production at Huckleberry this year is expected to total 36 million lb. copper and 175,000 oz. silver.

Due largely to the $67.4 in remediation costs at Mount Polley, Imperial recorded a net loss of $49.2 million, or 66¢ per share (on revenues of $22.7 million) in its third quarter, compared to net income of $14.7 million, or 20¢ per share (on $51.7 million in revenues) in the same period of 2013.