Canadian Royalties To Renegotiate Debentures

If market conditions don’t improve, Canadian Royalties (CZZ-T, CRYAF-O) might not have enough cash to pay interest on $137.5 million in debentures due in March 2015.

The company, which has suspended construction of its Nunavik nickel mine project in Quebec’s Ungava region, is trying to renegotiate the terms of its 7% convertible senior unsecured debentures that were issued last March.

With $20 million in the bank, interim president and CEO Glenn Mullan says the company has enough cash to meet all of its commitments for about two years. Mullan says the company would like to extend that time-frame by addressing the debenture issue. He says it’s better to address the issue now, rather than later, when the company has run out of money.

“We’ll be in a better position to finish funding the project going forward,” Mullan says. “And if we ignore it, we’ll be causing more peril to Canadian Royalties.”

A few months before the debentures were issued, the company completed a private placement with Norilsk Nickel (NILSY-O), which bought a 7% interest in the company at $3.45 per share, for a total of $25 million. But the price had fallen, and Mullan says the underwriters came up with unsecured convertible debenture using a con-version price of $2.75. The debenture would give the company better optics and the same amount of cash, but was done with the intention that a $250-million credit facility would be closed within a few months, giving the company enough money to go into production.

“When conditions continued to deteriorate we got caught, and so the debenture got done but the credit facility didn’t,” Mullan says.

He says that having a convertible debenture without being able to complete the project development and having no cash flow basically predetermines a negative outcome.

“If we don’t do anything, the money will get sucked out in interest payments over a period of years and there’s nothing left and we won’t get the project finished,” Mullan says. “Therefore, we are motivated to take advantage of these conditions to try to address that and see what we can do right now.”

Canadian Royalties is also considering selling equipment, applying for tax credits, cutting jobs and exploring joint-venture opportunities.

The company decided to delay project development last August when it was clear there would be no credit facility arranged anytime soon.

“We were spending a million dollars a day at that time in construction,” Mullan says. “We had made a commitment amongst ourselves and the board that if we didn’t have all the project funding in place by that date that we were going to suspend.”

Mullan says that if the company can successfully renegotiate its interest payments on the debenture, the burn rate will be cut to about $2- 3 million per year, giving it a few extra years to weather the storm.

In 2007, Canadian Royalties completed a bankable feasibility study that supported the construction of a $466-million project with a mine life of nine years and a production rate of 3,500 tonnes per day, starting in mid-2010.

The company’s original goal was to produce 26 million lbs. nickel in concentrate, 38.8 million lbs. copper in concentrate, 900,000 lbs. cobalt in concentrate, 14,500 oz. platinum and 78,600 oz. palladium per year over nine years.

An economic assessment completed last year for the Mequillon deposit, part of the Nunavik project, forecast it could double the mine life to 18 years.