Imperial casts about for strategic alternatives on poor H1 output, Moody’s downgrades ratings

VANCOUVER (miningweekly.com) – Imperial Metals is assessing strategic alternatives for its portfolio of base metals mines in British Columbia, after announcing that production will not meet guidance and that the company will breach bank covenants and require additional financing.

The TSX-listed firm reported on Thursday that second-quarter production results from its Red Chris, Mount Polley and Huckleberry (on care and maintenance) copper mines were weaker than expected.

Imperial advised that copper recovery at Red Chris continues to be lower than planned and, although higher grades of ore are scheduled to be mined in the second half of the year, the company is unlikely to meet the lower end of its 2017 targeted copper production level of 85-million pounds of copper.

Red Chris, which achieved commercial production on July 1, 2015, produced 15.4-million pounds of copper and 6 159 oz of gold during the three-months ended June.

At Mount Polley, production for the second quarter was 5.6-million pounds of copper and 13 958 oz of gold. Copper output was lower than targeted as copper grades from the Cariboo pit continued to be below plan. Gold output was near the targeted levels.

Imperial stated that given the lower copper grades in the Cariboo pit, copper production for the year is not expected to meet the lower end of the original target of 26-million to 29-million pounds, but will be in the range of 22-million to 24-million pounds.

Mount Polley incurred a breach of its tailings dam in August 2014, and received authorisation to resume normal operations in June 2016.

Because of the lower-than-expected output in the first half of 2017, Imperial said it will not meet certain financial covenants under its bank senior credit facility. The company has initiated discussions with its senior credit facility lenders and has requested a waiver of these covenants.

Imperial said it is in the process of revising the ongoing mine plans for both the Red Chris and Mount Polley mines.

Complicating its affairs as a further consequence of the weak production results, the company expects to require more financing and will consider all its options, including a review of strategic alternatives.

DEBT DOWNGRADE
Moody's Investors Service weighed in on the announcement on Friday, downgrading Imperial's corporate family rating to Caa2 from Caa1, its probability of default rating to Caa2-PD from Caa1-PD, and senior unsecured rating to Caa3 from Caa2. The company's speculative liquidity rating was lowered to SGL-4 from SGL-3. Imperial's outlook was changed to negative from positive.

"The downgrade and negative outlook reflect Imperial's announcement that production will not meet its guidance, it will breach bank covenants, require additional financing and it will review strategic alternatives," said Moody's VP Jamie Koutsoukis.

The negative outlook reflects Moody's view that, at 12x adjusted LTM [last twelve months] debt/Ebitda [earnings before interest, taxes, depreciation and amortisation], Imperial's capital structure is likely untenable, and that all its C$800-million in debt is likely to be restructured, according to Moody’s.

The agency stated that it will further downgrade the company if it expects an imminent default. A higher rating would require Imperial to successfully address all its upcoming debt maturities and improve and sustain its operating performance, including generating sustainable positive free cash flow and a reduction of leverage towards 6x.

The $325-million senior unsecured notes are rated one notch below the corporate family rating because of the prior ranking of the first and second lien facilities, Moody’s said.