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First Quantum rings the alarm bell

20th February 2016

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – Base metals miner First Quantum Minerals on Thursday night rang the alarm bell that it might be at risk of breaching certain debt financing covenants this year, placing the company’s ability to continue operating in jeopardy.

The Vancouver-based company had been dealing with a mountain of debt amid a collapsed market environment for base metals such as copper and nickel.

While First Quantum stated that it was in full compliance with all existing facility covenants as at December 31, it disclosed in regulatory filings accompanying its fourth-quarter results that current forecasts for 2016 indicated the company might breach the net debt-to-Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio covenant during the coming twelve months, which cast “significant doubt on the company’s ability to continue as a going concern”.

“We're keeping our lending group fully embraced of developments and initiatives within the company. And we've had discussions with them during the past few months; they are working alongside us to understand the requirement from the company and they're also patient in terms of benefit,” stated First Quantum president and CEO Clive Newall on Friday during an analyst conference call.

He stated that, at the end of the fourth quarter, the company’s net debt-to-Ebitda level was at 5.8%, compared with the 7.5% requirement, adding that it would step down to 5.5% and then down to 4.5% in the second half of the year. “So we still have plenty of time before you see that step down and we are working on the various strategic initiatives,” said Newall.

First Quantum told investors that, as at December 31, total debt amounted to $4.7-billion. The company planned to reduce its net debt position by more than $1-billion by the end of the first quarter through a combination of asset sales and other strategic initiatives. First Quantum had significant debt repayments coming due in the medium term, including $1.1-billion in 2020, $1.1-billion in 2021, and $839-million due in 2022.

The company advised that it had been impacted by market volatility and significant falls in commodity prices, particularly copper and nickel, along with power restrictions in Zambia. The current conditions had impacted on the company’s Ebitda generation, putting at risk the company’s ability to meet the net debt-to-Ebitda ratio covenant under the $3-billion term loan and revolving facility, the $350-million Kansanshi facility and the $100-million equipment financing facility.

At the end of last year, First Quantum had only $365-million cash in the bank and $1.8-billion available through committed undrawn facilities, as well as future cash flows, to meet all current obligations as they became due.

Should First Quantum breach a covenant in its financing agreements, this would constitute an event of default which, if unaddressed, would entitle the lenders to make the related borrowings immediately due and payable, which would result in all other borrowings also becoming due and payable.

First Quantum had in the past year undertaken a number of actions to reduce cash outflows, manage its debt and working capital, and increase Ebitda, and was managing the situation closely.

The company was busy developing the $5.5-billion Cobre Panama copper project, in Panama, which it acquired through a C$5.1-billion acquisition of Inmet Mining in 2013. The company announced that it had managed to shave 15% off the capital costs of the mammoth project, to now only total $5.48-billion, down from the original estimate of $6.42-billion.

First Quantum on Thursday advised that, for 2016, net capital expenditure (capex) would total $710-million, including committed expenditure of $390-million on the Cobre Panama project, in Panama; ramping up to capex of $820-million a year in 2017 and 2018, with Cobre Panama requiring capex of about $480-million each year.

The company late on Thursday reported adjusted earnings of $190-million, or $0.28 a share, well ahead of analyst expectations.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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