Despite owning one of the world’s biggest open cut nickel mines in Brazil, Mirabela Nickel (MBN) is struggling to remain afloat as it faces the loss of a major customer and has cash draining out of the business daily, while the company’s share price has plunged to new lows where it is pricing the company as a bust about to happen.
Two major ratings groups cut the company’s debt to near default levels and the shares lost further ground yesterday, dropping under one cent on the ASX at one stage – that’s as big a sign as anything that investors think the company is about to collapse.
Ratings agencies, Moody’s and Standard & Poor’s both reckon Mirabela’s debt is now the highest risk of junk, and, after downgrades last week and this week.
The company’s woes are not hard to find and echo those of much of the nickel mining and processing industry – weak prices. After reaching $US48,700 a tonne in early 2007, the price of nickel has fallen to $US13,775 a tonne, which is under the cost of production and processing for many companies and mines.
Mirabela’s debt is over $US400 million and the company’s available cash reserves are falling by more than $US3 million a week.
Although the shares have been weak for years after they plunged in the GFC, the past week has seen the pressures intensify as the news had worsened.
A major customer has cancelled a contract, the shares fell to a succession of record lows an ratings group, Standard and Poor’s Ratings cut the Company’s corporate credit rating from B minus to Triple C negative. Moody’s followed suit yesterday cutting its rating to Caa1 from Caa3, which is the bottom level of high risk junk.
The latest downgrades come as a result of the Company and Operational Update announcement to the ASX on September 26 and the follow-up statement on October 1.
S&P said the ratings change "reflects our concerns that Mirabela could face an imminent call of more than 50 per cent of its current cash holding to repay the $US50m facility extended by Banco Bradesco before the maturity date".
S&P added that if Bradesco sought to accelerate its loan or Mirabela repaid the loan but did not obtain alternative funding, and nickel prices did not rise above $US7 a pound in the coming months, the significant reduction in liquidity would jeopardise the company, which sounds like a bit of an understatement given the way the share price sank yesterday.
Last week’s ‘news’ sent the shares down more than 50%.
Yesterday, Mirabela shares fell a further 16% to one cent (a low of 0.8 of a cent was hit during trading) after the downgrade news was released.
MBN YTD – Cancellation, downgrade sends MBN stock to one cent
Last week’s 55% plunge came after an extensive update on September 26 revealed that it was about to lose one of its two customers.
The October 1 statement confirmed the loss of that customer in Brazil.
"Votorantim Metais Niquel S.A, that Votorantim intends to close their smelting facilities from November 2013 due to the adverse nickel market conditions. Votorantim considers that the concentrate sales agreement with Mirabela will terminate at the end of November 2013.
"Mirabela has two significant debt structures currently in place.
"Mirabela’s subsidiary, Mirabela Mineração do Brasil Ltda, has a US$50 million facility with Banco Bradesco S.A., which is secured by the Company’s contract with Votorantim (Bradesco Facility).
"Mirabela has on issue approximately US$395 million of 8.75% senior unsecured notes due 2018 Notes.
"Mirabela has taken preliminary legal advice from its Australian counsel and is of the view that the notice received from Votorantim may constitute an event of default under the Bradesco Facility. If an event of default is triggered under the Bradesco Facility, and Bradesco chooses to enforce its rights by accelerating repayment, a cross default under the Notes may also be triggered.
"As required under the Bradesco Facility, Mirabela has provided notice of the potential event of default to Bradesco. Given that the Bradesco Facility and the Notes are both governed by New York law, the Company is seeking confirmatory legal advice from its US counsel in relation to these matters," the company said in its statement earlier this week.
Mirabela has been hurt by the persistent global over-supply of nickel, and has had to write down the value of its assets as it cut costs, including hundreds of jobs while struggling to repay its debt. Last month it announced it was ending its listing on the Toronto Stock Exchange in Canada as part of its cost cuts.
It says it had begun discussions with its other customer, Norilsk Nickel in Russia, and other potential customers about nickel deals for 2014.
At the end of the 2012-13 financial year it held more than $US448 million ($A480.92 million) in total debt.
The company doesn’t have enough cash on hand to survive for a long time and is chewing through its existing reserves at an alarming rate.
The company said on September 26 that it held cash on hand and on deposit of $US79.7 million at the end of August 2013 , down from $US108 million as at the end of June. At this rate the cash will be gone by March next year unless it restructures its debt. Mirabela raised $US120 million in an issue in June of last year. That money has been lost.
"Given this heightened risk profile, and the fact that nickel prices are forecast to trade below the company’s break-even position in 2014, Mirabela intends to continue exploring opportunities for new strategic, financing and off-take alternatives," the company said last week.
"The Company notes the challenging short-term production outlook with the open pit mine being out of sequence post the nitrate supply disruption. This may result in the Company achieving full year contained nickel production of less than 17,000 tonnes, the lower end of Mirabela’s current production guidance. Mirabela expects to be in a position to update its 2013 guidance for production, unit cash cost and capital expenditure by the time it releases its third quarter results later in October.
"The Company notes the increased risk to its business as a result of the challenges outlined above. While the impact of these events are difficult to quantify, should one or more of the risks crystallise the cumulative effect on the Company’s cashflow could be significant, particularly in the context of the Company’s debt repayment obligations.
"Given this heightened risk profile, and the fact that nickel prices are forecast to trade below the Company’s break-even position in 2014, Mirabela intends to continue exploring opportunities for new strategic, financing and off-take alternatives. The Company will update the market when it is able to further quantify the potential impact of the risks to its business, as well as in respect of its ongoing process to identify strategic and funding solutions."
Mirarbela’s huge Santa Rita mine in Brazil is one of the world’s largest open cut nickel operations with a life of more than 20 years at the moment.
