Much has been written this year about the financial plight of Canadian mining companies resulting from the lack of capital, falling commodity prices and rising operating costs.
For good reason.
Raising capital through the equity markets is difficult, the availability of debt is limited and foreign investment has slowed.
Funds from other sources such as private equity investment, the sale of non-core assets, strategic partnerships or royalty or streaming arrangements are options that are available to only some companies.
According to a recent Deloitte analysis, the cash resources for the median Vancouver producer or developer have dropped 35% over the past two years and the number of mining companies with more than $5 million in debt has jumped 68%. As a result, an increasing number of companies are facing difficult decisions on cash management and strategic options.
For these financially distressed mining companies, Canada’s insolvency and restructuring legislation can be used as a shield rather than as a sword for their creditors.
In particular, the proposal provisions of the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement (CCAA) provide a number of useful tools that can be used to bridge the gap between cash needs and economic recovery, particularly where the financial difficulties arise from issues such as a temporary fall in commodity prices, labour disruptions or insufficient cash flow to cover the period to mine production.
While a full overview of the CCAA and BIA proposal provisions is beyond the scope of this article, both are intended to afford companies the necessary “breathing room” through a stay of proceedings against creditors taking action against them, provided they have sufficient operations by which a proposal or plan of arrangement can be presented to their creditors, bringing certainty in otherwise uncertain conditions. In the case of the CCAA, the debtor company’s debt must be more than $5 million.
In the case of the BIA, while there is no monetary debt limit, a failure to successfully present a proposal that is acceptable to the creditors results in a bankruptcy.
In either case, the provisions can be used to prevent contracting parties, such as critical suppliers and lessors, from terminating their agreements with the company and, conversely, provide a mechanism for the company to disclaim financially onerous contracts where appropriate.
In addition to these benefits, the company remains in near-complete control of its operations and assets and continues, for the most part, its status-quo operations.
A requirement is that a monitor be appointed by the court to oversee and report as to the company’s status and financial affairs and to confirm the company is acting in good faith in its restructuring efforts.
Further, two recent CCAA proceedings involving mining companies illustrate how the use of “debtor in possession” (DIP) financing can be an invaluable financing tool to address cash-flow requirements.
DIP financing is available under both the CCAA and the BIA’s proposal provisions. In approving the DIP, the court has discretion to grant “super-priority” to the DIP lender to secure the loan.
The theory behind such priority is that lenders who take on the risk of lending to a financially distressed company should have optimal security for doing so, as the interests of various stakeholders who benefit from keeping the mine operating, such as employees in otherwise economically depressed communities, may override the immediate interests of the company’s existing creditors who can lose priority to the DIP.
In one of the recent cases, the DIP lender was the existing primary secured creditor. By working together and availing themselves of the CCAA’s DIP provisions, the secured creditor was able to obtain financial security prior to injecting further funding into the mine.
The company was able to obtain the necessary breathing room and, it is hoped, will restart operations and achieve profitability for greater benefit to more stakeholders, which is the successful result the restructuring provisions are designed to accomplish. •
