What happens if Imperial Metals goes bankrupt?

Company’s financial woes raise concerns about the fate of Mount Polley and Red Chris mines

Imperial Metals, the owner of the Mount Polley and Red Chris copper-gold mines in British Columbia, is “totally on the brink” of bankruptcy according to a mining accounting expert.

“They’re not even close to making money,” Thomas Schneider, an expert on financial reporting of environmental liabilities and assistant professor of accounting at Ryerson University, told The Narwhal. “It’s just a matter of ‘can this company make enough cash flow.’ And they’re just coming off a strike.”

“This company is on the brink,” he added. “There’s no two ways about it.”

Imperial’s share price was at press time $1.33, down from over $18 per share in early 2014.

The company is currently surviving on debt, paying $75 million per year in interest expense. Interest payments are being made by issuing shares to creditors rather than cash — yet another bad sign. Recently, Imperial issued 3.1 million shares valued at $1.97 each to pay off interest of $6.1 million. But shares are now $1.33, meaning that similar attempts may require the issuing of even more shares to pay interest, which could lead to dilution and an even lower share price.

Schneider said that it “looks to me like a downward spiral.”

The company’s latest quarterly financial statement reported a net loss of $36.6 million. These losses were blamed primarily on the recent two-month strike at Mount Polley and lower-than-expected recovery at Red Chris, exacerbating an already weak financial position from a few years of low copper prices and the sizable impacts of the tailings disaster.

Copper prices have continued to decline since the start of the trade war between the United States and China in early July.

The big date that Schneider said to watch is October 1: by then, the company needs to have re-negotiated a $200-million credit facility — a type of loan from investors — some $44.1 million of which is currently used to secure letters of credit for reclamation costs at its mines.

If the group of creditors decide to walk away rather than continue finance the struggling company, Schneider said Imperial Metals will suddenly face massive unfunded reclamation costs.

In a recent conference call with investors and analysts, Imperial’s chief financial officer said: “We are in discussions with our lenders and continue to work on financing alternatives and solutions for this debt.”

Imperial Metals did not respond to multiple requests for comment.

‘Holy cow, what are we financing?’

A spokesperson for the B.C. ministry of energy, mines and petroleum resources said in an e-mail that the province’s chief inspector of mines can demand payment in full in the case of a non-renewal of letters of credit.

The company’s reclamation costs are now estimated at $100.9 million with only $14.3 million secured in cash. Schneider said that an immediate requirement to secure the remaining amount would “for sure trigger bankruptcy.”

The figure of $100.9 million is the result of a “discount rate” that estimates the present value of future liabilities based on anticipated rate of return of investments. The higher the discount rate due to perceived risk, the less that has to be set aside today.

According to Imperial Metals, the full “undiscounted” cost of its environmental liabilities is $173.6 million.

“When are the creditors going to say ‘holy cow, what are we financing?’ We’re financing the B.C. government not to have to do the clean up, so why don’t we just walk away and let the government do the clean up?’ ” Schneider said.

The company’s second quarter report for 2018 indicated that it was planning to pay for $28.4 million of the $100.9 million in future site reclamation provisions in “mineral property, plant and equipment.”

The company may be required to cover that amount in cash, which would likely require them to take on even more debt. Another $14.3 million is held as reclamation deposits, up from $4.7 million in 2016.

An estimated $86.3 million in reclamation costs are expected to be paid between 2018 and 2046, leaving about $14.7 million after 2046. Schneider said the undiscounted liabilities after 2046 may be around $100 million.

“How many equity investors care about a liability that the company has to pay in 2046?” Schneider said.

“Who really cares about it? We do. The government does. The people do. At the end of the day the equity investors don’t give a damn, and the longer you can put this stuff out the better it for the equity investors and the worse it is for the general public.”

‘The whole clean up thing is a real misnomer’

It’s unclear if that figure of $100.9 million is even enough to pay for future costs.

Imperial Metals acknowledged as much in its latest annual report: “The actual costs of reclamation set out in mine plans are estimates only and may not represent the actual amounts that will be required to complete all reclamation activity. If actual costs are significantly higher than our estimates, then our results from operations and financial position could be materially adversely affected.”

For many, the Mount Polley mine is the most immediate concern when it comes to clean up. The 2014 tailings breach released 25 billion litres of waste into nearby waterways and forests.

In 2017, Imperial Metals estimated a total of $67.4 million had been spent in clean-up costs for the Mount Polley spill. Of that, $15.5 million has been paid directly by government departments, with another $23.6 million eligible for tax refunds.

The company increased its rehabilitation provision for the Mount Polley mine by $5.8 million in 2017. Schneider said that amount is the company’s best estimate of what is required to finish cleaning up Mount Polley, with $3.6 million of it being spent in 2018.

But local residents said in interviews with The Narwhal that the catastrophe is far from over.

“The whole clean up thing is a real misnomer,” said Jacinda Mack, co-founder of Stand for Water and member of the Xatśūll (Soda Creek) First Nation. “All they did was re-engineer. Everything is still in Quesnel Lake, Polley Lake, in the forest. And they say it would be more disruptive to try to remove the tailings. But if those tailings were filled with gold, they would find a way to remove those tailings.”

“Communities have received zero compensation,” Nikki Skuce, project director of Northern Confluence, said. “There’s been no fines or charges. Reclamation isn’t done. We don’t know what the long term impacts are on salmon and the water of Quesnel Lake.”

Douglas Watt, a retired metallurgist and member of the Mount Polley Mining Corporation’s public liaison committee, said it could take up to 1,000 years for the “totally devastated” Hazeltine Creek to return to what it used to be. The biggest concern for local residents, he said, is that Mount Polley received a permit in April 2017 to discharge effluent into Quesnel Lake until the end of 2022.

Watt said that immediately after the mine received the permit, the publicly announced life of the mine went up by another four years, to 2026. He said that within a few months of receiving the permit, the mine was already out of compliance with some of the permit’s conditions — and that it’s still out of compliance to this day.

“Our biggest fear is that they’re going to now ask the ministry for a permit amendment to continue to discharge their effluent beyond 2022,” said Watt, who worked for Imperial Metals in the late 1980s. “I’m pretty sure they’re probably working on that now.”

On August 15, it was announced that the B.C. Environmental Appeal Board will hear an appeal of the permit from a member of Concerned Citizens of Quesnel Lake at the end of January 2019.

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James Wilt