Osisko gets breathing room from creditors

With margins being squeezed by falling metal prices, miners that used debt financing to build projects are feeling the need for some relief. 

Fortunately for Osisko Mining  (TSX: OSK; US-OTC: OSKFF), the creditors that helped finance its large-scale Canadian Malartic gold mine in Quebec’s Abitibi gold belt have taken a friendly stance and allowed the miner to wriggle out of a tough spot.

At over $1 billion Canadian Malartic was an expensive mine to build, but in the high gold price environment investors hardly blinked when getting behind the low-grade, big-tonnage project. With the turn in the gold price, however, Osisko is feeling the heat of its impending debt-repayment schedules.

The solution? Modify the terms and the repayment schedule of the $225 million it owes in long-term debt — issued by CPPIB Credit Investments, Caisse de dépôt et placement du Québec (CDPQ) and Resources Quebec (RQ).

With over 80% of the loans due next year, and close to 20% due this year, coming to better terms was important.

And the company did just that: it doesn’t have to pay back the $75 million owed to CDPQ and RQ until 2017. For the privilege of a later expiration date, Osisko agreed to lower the conversion rate. Before the debt was convertible at a price of $9.18 per share — but it’s now convertible at $6.25 per share.

As for the $150 million due to CPPIB, payments on that credit facility are now to be paid annually up until 2017, whereas before $39 million was due this year and $111 million was due next year. The new scheme will see it pay $30 million next year and $40 million per year for the next three years.

But the good news doesn’t end there. Not only does Osisko get more time to generate wider margins at its mine to pay back the debt, it also gets to make less payments. The deal sweetener came as the three creditors agreed to lower the interest rate on the debt, which drops to 6.875% compared to the original 7.5%. If only all bankers were so kind.

Thanks to the favourable new terms, Osisko said that the $100-million, drawn-down facility it established with CPPIB is no longer needed. 

The new terms, however, couldn’t mask the toll that lower gold prices are taking on the company’s balance sheet. Osisko’s second-quarter earnings showed a $488-million writedown in connection to its Hammond Reef gold project in northern Ontario. 

Not considering the non-cash writedown of the asset, earnings remained positive, albeit less so than last year. For the quarter, earnings exclusive of the writedown came in at $25.1 million, or 6¢ per share, compared to $35.6 million, or 9¢ a share, for the same period last year.

When the writedown is considered, Osisko shows a $492.8-million loss.

Despite taking a heavy hit on Hammond Reef’s valuation, Osisko says it is an active project, and that one day the mine could stand alongside its flagship Canadian Malartic mine as a major contributor to the company’s bottom line. 

But until gold prices improve, Osisko will have to cut back on exploration spending, mine development and how much it invests in processing equipment at the project.

As for its chief asset, Canadian Malartic, the mine produced 111,701 oz. gold in the second quarter and set a monthly record for production in June. The company held firm on its previously announced guidance for the mine of between 486,000 and 510,000 oz. gold for the year.

Trucks hauling earth at Osisko Mining’s Canadian Malartic gold mine in Quebec’s Abitibi gold belt.