Cline keeps its head above water

Six months after Toronto-based Cline Mining (CMK-T) suspended operations at its wholly owned New Elk metallurgical coal mine outside of Trinidad, Colo., the company is still searching for answers.

Cline announced New Elk’s closure in mid-July after tumultuous global economic conditions triggered a free fall in met coal demand. The company had predicted a 60-day suspension, but New Elk remains inactive heading into 2013.

“We have taken all the necessary actions so that we preserve our capital position and conserve our working capital,” director and CEO Ken Bates commented in September. “The implementation of the [coal marketing] strategy is also key, and we are firmly committed to this process and achieving a financially viable and economic rate of return for our coal product. The New Elk mine is an asset with long-term potential as markets recover.”

Despite dropping overhead costs at New Elk to US$650,000 per month, Cline succumbed to cash shortages in mid-December when it defaulted on a semi-annual bond interest payment totalling US$2.5 million. The company borrowed US$50 million through senior secured bonds in December 2011.

On Dec. 27, Cline tried alleviating the pressure by reaching a financial restructuring agreement with Marret Asset Management. The agreement covers an adjustment to the outstanding senior bonds and incorporates a change to the company’s share-purchase warrants, priced at C$1.15 through May 14, 2015.

Marret agreed to purchase US$7 million in new bonds under the same terms as the existing loan, which would go towards general operating expenses and the outstanding semi-annual bond payment. The exercise price of the company’s outstanding warrants would also be amended to 100% of the weighted-average trading price for Cline’s shares during the five trading days leading up to Dec. 24, 2012. The maturity date of the bonds would be extended into February 2016.

Due to a share subscription right, current shareholders could end up owning 46% in Cline, while the bondholders would hold the additional 54% stake. The agreement also indicates that US$25 million in the principal bond amount will be exchanged for 2.1 billion shares in Cline, which equates to 1.2¢ per share.

Cline says the restructuring addresses short- and long-term financial difficulties, and sustains three years of operations under care and maintenance. Though the transaction would typically require shareholder approval, Cline has applied for an exemption, citing financial hardship.

“This restructuring is an important step in [Cline’s] efforts in developing a long-term financial solution to address the uncertainty regarding the magnitude and extent of the downturn in the coal markets,” Bates explains.

Despite the restructuring, the Toronto Stock Exchange started a delisting review on Jan. 4, giving Cline 60 days to regain compliance with requirements.

Cline brought in chief operating officer David Stone prior to New Elk’s closure to conduct a review on the mining complex so that it could maximize output from existing infrastructure and achieve the highest short-term production output. The company focused on New Elk’s Northern and Southern areas, which it believes can supplement the Central zone and offer opportunities for low-capital brownfield expansion.

“The results of the review have clearly demonstrated that the resource can be transformed into a world-class mining complex. The entire plan has been built from first principles, taking into account geology, equipment and infrastructure,” Stone stated following his review. “A detailed implementation action plan — inclusive of all required factors, including safety, human resources, financials, logistics, engineering and maintenance — is well underway for the entire operation.”

New Elk was expected to produce 426,000 clean tonnes of met coal in 2012, with plans to ramp-up output to 2.7 million tonnes of saleable coal per year. New Elk hosts resources totalling 561 million tonnes of steelmaking and thermal-grade coal.

Things have looked increasingly grim for Cline’s shareholders, as the company’s stock has plummeted 92% since New Elk’s closure in mid-July, when it traded at 66¢.

Cline’s shares stayed depressed in the new year, with the company closing at 6¢ on Jan. 4 on the back of 1.5-million share-trade volumes.

Cline has 209 million shares outstanding for a $12.6-million press-time market capitalization.