From undertaker to fixer

From undertaker to fixer
Illustration: Justin Renteria
It’s no secret it’s been a tough year in the mining sector, especially for those in the exploration and development stage struggling to get much-needed access to cash in order to further their ventures. Falling commodity and share prices — off considerably from their 12-24 month highs — coupled with the inability to get financing from spooked capital markets has created a formula for unpleasant discussions about what to do next.

Enter the restructuring and insolvency lawyers. But unlike the past, in some cases they have come armed with solutions for mining companies that may have thought all hope was lost. “The perception can often be that restructuring lawyers are undertakers as opposed to fixers,” says John Sandrelli, a partner and specialist in restructuring, insolvency, and bankruptcy with Dentons Canada LLP in Vancouver. “Our experience has been if companies deal with matters well in advance of a crisis there is a lot more flexibility for them in ultimately coming back to full production, or becoming a company that is more a development company to retain its assets and ultimately come back when markets improve.”

Unlike in other markets, mining companies don’t tend to want to buy other mining companies when they think they are at a low — they don’t have a lot of cash themselves and would rather do it when the market starts to tick up again.

The first hurdle in restructuring to a healthy position is convincing a management team such a move doesn’t have to be equated with bad news. “They will often say, ‘John, you’re the last person I want to talk to,’ because they associate it with negative information in the media, particularly for public companies. So getting over that stigma is particularly a challenge,” says Sandrelli.

Another challenge emerges where the management team makes up a significant portion of the shareholders or have been a part of a team that has raised money from a group of shareholders and do not want to explore anything that leads to a significant dilution of the existing shareholders. “That’s where sometimes I think it is in the best interest of the company for the independent board members or the audit committee of the board, in the case of the public company, to identifying a crisis well before it hits,” says Sandrelli.

Tackling the balance sheet through debt conversion can often make a company more marketable to raise further equity or financing and that can be done through a Canada Business Corporations Act type of restructuring arrangement, which can be efficient in terms of correcting the balance sheet and the capital structure without a shareholders meeting, or more formally under the CCAA. “That would be for the company that has larger debt issues or publicly traded debt. Our message is there is an opportunity in down markets when your share prices are depressed to take steps to clean up the balance sheet even though it has a significant dilution effect on existing shareholders. When the markets do come back you’re much more attractive to raise that additional equity or debt financing,” says Sandrelli.

He points to North American Tungsten Corp. Ltd., a client he worked with a few years ago in completing a CCAA reorganization that saw it restructure its capital and balance sheet and return to full operation. “We were able to obtain a stay of proceedings in CCAA. The company needed that structure to recapitalize the balance sheet, which we did, but also the stay of proceedings allowed them to hold off creditors and send a message to the employees, suppliers, and the market that it wasn’t a chaotic situation,” says Sandrelli. “Sometimes a filing can create a stabilizing effect where you can get your message out that there is a path of restructuring. We did that through a convertible debt structure that ultimately saw the existing shareholders be significantly diluted, but ultimately significant financing came out of the ashes and they carry on to this day.”

And while the mining industry is familiar with the ups and downs of the market, some say this time things are different. “I think there is a differentiator in the industry between those who think this is cyclical and those who believe it’s a more fundamental realignment in the sector,” says Sander Grieve, head of the mining practice at Bennett Jones LLP in Toronto. “For the cyclical guys, the incentive is ‘we need to weather this and get to whatever it is that changes things.’ For others it’s a more fundamental look at what they’re doing in the business.”

Grieve says Bennett Jones is working with a number of issuers looking at possibilities including cutting costs and how they engage in reductions in the short term and the longer term. “They’re looking at assets and their focus in the market and whether that means certain assets will go.”

Even though it’s been slow for M&A this year, Grieve insists there is life out there. “Across the group, I think we’re starting to see a few more deals getting done but I can’t say it’s a torrent,” he adds. “There are smaller deals and more creative things like off-taking arrangements and that sort of thing.”

While some predict September may show signs of recovery in the mining sector, few are willing to commit to a real forecast. “I don’t think we’re going to see any real resurrection this year. I probably have conversations five or six times a day with bankers and company executives and it really is a difficult time for them,” says Robert Mason, a partner with Norton Rose Fulbright Canada who works with a mix of clients in the mining sector including mid-cap and junior mining companies. “Certainly the juniors are struggling with this,” he says. “I would think all mining companies in one way or the other are dealing with this but it’s the juniors that are most exposed and have the fewest options.”

Mason says it forces companies to focus on key projects and make tough decisions they wouldn’t have to make in better times. Some decisions could include cutting spending to free up funds the company still has. This includes terminating any non-essential exploration work as well as any plant expansions. On the human resources side, it may also mean a hiring freeze or reductions in staff as Barrick Gold Corp. did in June when it announced one-third of its corporate staff in Toronto were being let go as well as dozens of workers in Australia and 55 employees in the U.S.

The next step is to consider equity financing options or other alternatives such as commodity streaming, commodity-linked notes or preferred-share offerings, high-yield note offerings, or traditional debt-like offerings. There’s also the concept of partnering with equipment suppliers and construction management companies.

“Commodity-linked notes and preferred-share-type offerings have been around before but not that prevalent,” says Mason. “A lot of companies are starting to turn to these alternative deals. We’ve worked on a number that are in the pipeline or in negotiations. They’re not anyone’s first choice because they tend to be more complicated or more expensive but they are the way the lucky companies can bridge the gap to better times.”

Streaming transactions involve a company selling “forward” some of its future production or a lump sum to advance its project towards production. Silver Wheaton Corp. of Vancouver has been doing this for some time. In February of this year, the company announced a U.S.$1.9-billion acquisition of gold streams from Vale SA.
“Silver Wheaton execs have said during 2006-08, when equity markets were flying, it was hard to get a streaming deal done because people had equity as the alternative, but now that equity is off the market, streaming has become a viable alternative for some companies and there have been a number of deals announced. It wouldn’t be everyone’s first choice but it works for both sides,” says Mason.

On the prevention front, it’s also wise to keep an eye out for proxy battles from shareholder activists, says Mason. “I have a few clients who are struggling in the mining sector as most of them are and we’re very concerned about proxy battles. I really think of proxy as the new M&A and there’s no other way to look at it.” That means keeping in touch with shareholders, building a strong and independent board of directors, and making sure all arrangements are in place to permit the board to react if a shareholder challenge comes up.

Overall, Mason says despite the dark times, the mining industry is populated with people willing to take risk and ride them out. “You have to make the best of it. I find the mining executives I work with to be incredibly optimistic people. They are risk takers by nature otherwise they wouldn’t be there and stay positive,” he says.

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