Cline strives to to stay above water

VANCOUVER — Six months after Toronto-based Cline Mining (CMK-T) announced a suspension of operations at its wholly-owned New Elk metallurgical (met) coal mine outside of Trinidad, Colorado, the company is still searching for answers.

Cline announced New Elk’s closure in mid-July after tumultuous global economic conditions triggered a freefall in met coal demand. The company had originally predicted a suspension of roughly 60 days, 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,” commented Director and CEO Ken Bates in mid-September. “The implementation of the [coal marketing] strategy is also key and we are firmly committed to this process and to 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 roughly 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 via senior secured bonds in December 2011.

On Dec. 27 Cline attempted to alleviate some of 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 will go towards general operating expenses and the outstanding semi-annual bond payment. In addition the exercise price of the company’s outstanding warrants will be amended to 100% of the weighted average trading price for Cline’s shares for the five trading days leading up to Dec. 24, 2012. The maturity date of the bonds will also be extended by two years through Feb. 2016.

Due to a share subscription right, current investors 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 a price of roughly 1.2¢ per share.

According to a statement from the company, the restructuring was necessary to address both short-term and long-term financial difficulties, including the ability to sustain roughly three years of operations under care and maintenance. Though the transaction would typically require shareholder approval, Cline has applied for an exemption under the umbrella of financial hardship.

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

Despite the restructuring the Toronto Stock Exchange announced it was conducting a delisting review on Cline on Jan. 4. The exchange has given the company 60 days in which to “regain compliance with [requirements], pursuant to the Remedial Review Process.”

Cline brought in Chief Operating Officer David Stone prior to New Elk’s closure to conduct a review on the mining complex in order to 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 to 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 roughly 426,000 clean tonnes of met coal in 2012, with a ramp-up plan in place to increase output to 2.7 million tonnes of saleable coal per year. New Elk hosts resources totalling 561 million tonnes of steel-making and thermal-grade coal.

Things have looked increasingly grim for Cline’s shareholders as the company’s stock has plummeted 92% of 66¢ since New Elk’s closure was announced in mid-July. Cline’s shares continue to be depressed to start the New Year, with the company closing at 6¢ on Jan. 4 on the back of heavy 1.5-million share trade volumes. Cline has 209 million shares outstanding for a $12.6 million press-time market capitalization.