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Heavy Debt Looms over Mining Shutdown

Many companies will not recover from extended closures, analysts say.
Apr 23, 2020 9:30 AM   By Leah Meirovich
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RAPAPORT... A number of diamond-mining companies that have halted production during the COVID-19 crisis will find it difficult to resume operations amid their struggles with debt, analysts have predicted.

The warning comes after several miners announced their assets would remain on care and maintenance until rough-diamond prices returned to a level at which their operations are viable to restart.

Firestone Diamonds plans to keep its Liqhobong deposit in Lesotho closed for at least a year, it said earlier this month. The company was uncertain when it would be able to sell its diamonds, what price it may get, and whether it could operate sustainably, it noted.

Similarly, Stornoway Diamonds said it would halt operations at its Renard site in Canada until “favorable market conditions return,” while BlueRock Diamonds has suspended operations at the Kareevlei mine in South Africa for the foreseeable future. Petra Diamonds, which has reestablished production at its South African mines, will prolong the shutdown at its Williamson asset in Tanzania indefinitely to “preserve the mine’s cash position” and protect its long-term sustainability, it said.

Miners’ debt levels are the largest factor impacting operations, not diamond prices, Panmure Gordon analyst Kieron Hodgson observed.

“It’s the financial issues preventing them from reopening,” he stressed. “If they were not encumbered by the levels of debt that they have, they would be operating now. The simple fact is that they can’t generate the revenue to satisfy operational costs. They are structurally flawed from a balance-sheet perspective that cannot be blamed solely on diamond-market prices.”

A nice little mine

Liqhobong, which has had financial issues since its inception, is highly unlikely to come back under Firestone’s ownership, Liberum analyst Ben Davis predicted.

“It has always underperformed...since commissioning, either from the quality of the stones, or the running of the operation. It’s been fairly difficult for them,” he opined. “It will take a very brave person to take it on. Anyone who was buying that asset today would need to believe much higher prices are coming, roughly where the market was in the fourth quarter of 2019, plus another 20%.”

Berenberg investment bank analyst Richard Hatch agreed that Liqhobong carried too much debt to be viable. “Firestone is an example where Liqhobong is a nice, profitable little mine, but the issue is the debt consumes the equity value,” he said.

The companies may have a difficult time resuming operations even after diamond prices rise to post-coronavirus levels.

“You don’t go into a crisis situation with a lot of debt and expect to come out of it unscathed,” Hodgson emphasized. “The debt-holders could restart the businesses, but they would never come back to — or it’s highly unlikely they would come back to — the equity market.”

Buyout or bailout?

Davis believed that while a full return is unlikely, there is a small chance the mines may come back, albeit under different ownership.

“Sometimes it would make more sense to shut them down, but because there’s always this debt to be serviced, they don’t,” he noted. “Debt holders will want to recoup some of the value to settle the books. They’re never going to run it themselves, so if a solution cannot be found, they will take ownership and try to sell it on to another party, now, or in better market conditions.

“I disagree with the idea that the mines aren’t ever going to come back. Under the right price environment some of these assets may come back, but if they do, they’ll come back under new ownership,” he stressed.

While Petra has not closed its Finsch and Cullinan mines in South Africa, both Hodgson and Davis felt the company may have to offload those assets as well, given the circumstances.

“I believe Petra is going to require a large capital-equity injection, but it will be very dilutive for existing shareholders,” expressed Davis. “Or they need to find a giant stone and it saves the mine. But it would have to be over 1,000 carats.”

While coming out of the crisis and prolonged shutdown under such a heavy debt burden is difficult, it’s possible Petra could emerge, Hatch said.

“Cullinan and Finsch are profitable mines, but the problem is that the debt consumes the value,” he said. “I think what’s probably more likely is that we see a debt refinancing, and as that debt gets refinanced, the company is on a more stable path. I’m struggling to see how [these] mines get allowed to fail, I think they would get bailed out, but I think it will come at a price.”

Petra is currently working towards restructuring its $650 million debt, Reuters reported Wednesday. The increased liquidity and flexibility of its repayment schedule could give Petra more time if the lockdown is extended and the mine is not making any money, the news agency said, citing unnamed sources who also cautioned that investment banks were increasingly reluctant to extend credit to diamond producers.

Hodgson and Hatch also see difficulties for Dominion Diamond Mines’ Ekati deposit, which is highly leveraged. The site was placed on care and maintenance despite the Canadian government’s allowance for mining to continue throughout the pandemic.

“With Ekati…[the] Jay [expansion] didn’t really make sense three years ago when they sold it, and it probably makes less sense now, given the price move,” Hatch noted about a proposed extension of the current mine. “That’s one that might be potential supply that comes off the market.”

Ratings agency Fitch this week downgraded the company’s credit, noting it had suffered through consistently weaker-than-expected financial performance, resulting in the need for covenant relief.

Dominion filed for insolvency protection in Canada on Wednesday, during which it intends to review its financial situation with creditors and stakeholders, it said in a legal filing. Insolvency is a method designed to allow a company to temporarily bypass creditor repayment while seeking new investment or a buyer for its operations. The miner is currently considering a proposal from an affiliate of its owner, the Washington Companies.

Ready to resume

However, most of the mining companies believe they will withstand the shutdown and recommence operations when prices pick up.

“Our intention is to reopen the Renard mine,” Stornoway CEO Patrick Godin told Rapaport News. “Whilst we are not yet clear on the date, our shareholders are fully committed to Stornoway Diamonds.”

BlueRock CEO Mike Houston echoed that sentiment. The company is in a cash-positive position, and is currently in an advanced stage of seeking a solution to market its diamonds, the executive said. If successful, that would allow the company to recommence production, he added. Firestone and Petra reiterated their earlier statements reporting the companies would resume production at their closed mines when diamond prices stabilized.

Dominion plans to resume mining operations at Ekati and safely recall its furloughed workers as the spread of COVID-19 subsides and diamond markets reopen, the company said in a statement. “Dominion continues to believe in the long-term viability of its assets and expects to emerge stronger and better able to deliver value to all stakeholders,” it added.

A smaller industry

The shutdowns at those mines will have only a small impact on overall diamond supply, Hodgson noted. A potential slowdown of the expansion at De Beers’ Jwaneng mine in Botswana, as well as operations at Alrosa’s sites in Russia, would have a more severe effect on global supply. De Beers noted that while work had paused on its Venetia underground project and Cut-9 at Jwaneng to comply with government regulations during the COVID-19 situation, these are long-term expansion projects and their status had not changed.

Still, Hodgson believed De Beers and Alrosa would also be taking decisions for their capital investments, adding that they had the balance sheets to absorb any changes.

High-quality producers such as De Beers, Alrosa, Gem Diamonds, Lucara Diamond Corp. and Lucapa Diamond Company are the most likely to survive, given their lack of heavy financial debt and their ability to withstand a long-term market shutdown, Hodgson said.

“Mountain Province, I think, will take a position at the table, simply because of their partnership with De Beers, and the ability to produce the types of goods that will be removed from the market due to Rio Tinto’s [scheduled] closure of Argyle,” he added. “I think that Petra’s operations at Cullinan and Finsch can produce the goods that will be in demand. I’m just not sure who will own those assets in three years’ time.”

Either way, all miners will be looking to slow down mining rates as they navigate the crisis and Hodgson believed total production would fall, with at least 10% to 15% of supply being lost over the next three years.

“This is unlikely to be a great year for diamond companies,” Hatch added. “I think it’s going to be a year where they go through quite a lot of disruption and pain.”

Image: Liqhobong mine. (Firestone Diamonds)
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Tags: Alrosa, Argyle, BlueRock Diamonds, COVID-19, Cullinan, De Beers, Diavik, Dominion Diamond Mines, ekati, Finsch, Firestone Diamonds, Gahcho Kué, Gem Diamonds, Jwaneng, Kareevlei, Kieron Hodgson, Leah Meirovich, Liqhobong, Lucapa Diamond Company, Lucara Diamond Corp., mountain province, Panmure Gordon, Petra Diamonds, Rapaport News, renard, Rio Tinto, while Stornoway Diamonds, Williamson
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