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.
Multiple lawsuits against Imperial Metals quashed by courts
Multiple lawsuits have been filed against the company for the spill, but all have been quashed.
Time has run out for criminal charges to be pressed in B.C. However, federal charges can still be laid sometime in the next year.
In 2017, Bev Sellars — the former chief of Xatśūll First Nation — filed a private prosecution against the company, but the B.C. Crown Prosecution Service halted the case after it concluded there wasn’t a high enough chance of conviction.
Ugo Lapointe of MiningWatch Canada also launched a federal private prosecution for alleged contravention of the Fisheries Act, but that was similarly stayed before he had the chance to present evidence in a court hearing.
“We’re concerned with not only the clean-up of the spill but the actual closure of the mine site and the clean up of the whole mine site,” Lapointe said in an interview with The Narwhal.
“You’re now dealing with a company that is not super financially viable, and it’s an increased risk for the public.”
A recent economic analysis by the Ecofiscal Commission found mines in B.C. often operate without adequate reclamation bonds and assurances, creating a major liability for the province’s taxpayers.
Majority owner of Imperial Metals donated more than $850,000 to BC Liberals
Imperial Metals’ majority owner, N. Murray Edwards, currently boasts a net worth of $2.9 billion, making him one of the wealthiest Canadians.
Companies owned by Edwards have historically been major donors to the BC Liberals, who governed the province for 16 years until one year ago.
Dermod Travis, executive director of IntegrityBC, wrote in an e-mail that total donations to the Liberals by companies owned or controlled by Murray Edwards total more than $850,000 since 2005.
That includes $199,180 from oilsands giant Canadian Natural Resources Ltd., $179,440 from Imperial Metals, $99,500 from Horizon Construction Management and $90,000 from CNR ECHO Resources.
In 2013, Edwards helped organize a million-dollar fundraiser for former premier Christy Clark’s re-election.
In 2004, an order in council forgave $2.9 million owed to the B.C. government by Huckleberry Mines, of which Imperial Metals then owned 50 per cent.
In 2017, then-interim leader of the federal Conservatives Rona Ambrose vacationed with Edwards for close to two weeks in the Caribbean.
Environmental liabilities may be underestimated
There’s also the strange situation of Imperial’s Huckleberry Mine, a copper mine that closed operations in late 2016 but may reopen in 2019 if copper prices increase.
Until April 2017, a syndicate of Japanese companies owned the other half of Huckleberry, but Imperial took it over after the syndicate couldn’t pay $77 million that it owed to the project. It was primarily because of that acquisition that the company declared a net profit in 2017. That followed consecutive years of significant losses, including losses of $96 million in 2015 and $54 million in 2016.
But Schneider said that it appears the estimated $22-million future reclamation liabilities for Huckleberry was improperly reported in the annual report, potentially requiring a reissuing of the financial documents.
The possible misreporting had to do with the “discount rate” used in reporting reclamation costs.. Schneider said Imperial Metals should have used a “risk free” discount rate of 3.2 per cent on reclamation liabilities at Huckleberry — but instead used a “credit risk adjusted interest rate” of 6.3 per cent.
That choice lowered the reported present cost of the liability. Schneider said it could end up as a difference of $20 to $30 million than if the company had used a “risk free” rate (let alone undiscounted rate).
In the end, the Huckleberry reclamation could end up costing as much as $100 million. The mine has an identified potential for acid rock drainage, which if triggered can result in significant impacts on ecosystems and wildlife.
Schneider said that Imperial Metals should potentially have to restate its financial figures, preferably providing an undiscounted amount. That would give investors and the public a far better idea of what the real costs might be.
Deloitte, which audited the company’s financial statements, refused to answer a question about the discount rate, writing: “Our policies and our code of professional conduct prohibit us from discussing any information about clients or the work that we do for them.”
The manager of investor and industry education at the British Columbia Securities Commission also said in an e-mail that “we do not comment about specific companies or market participants.”
Imperial Metals could still be rescued
It’s not known if Imperial Metals will end up declaring bankruptcy.
The creditors may renew the $200 million credit facility in October, hopeful for improved cash flows from the mining operations. Schneider said that creditors may not want to take the assets over given the company’s very high debt-to-equity ratio.
“Maybe things are in place and all will be fine — we shall see,” Schneider said.
Or Edwards or the companies he controls — which currently own 40 per cent of the company and more than $200 million of Imperial’s debt — could come to the rescue.
Lapointe of MiningWatch Canada said Imperial Metals has “pulled similar financial stunts” before, and that Edwards or affiliates will often bail companies out.
Sustained lobbying efforts could also help.
“The companies that are in bad financial situations like this for a number of years tend to lobby the government even more and try to leverage any kind of political support they can get to then get any possible subsidies or tax breaks or lower securities,” Lapointe said.
In 2016, the B.C. government introduced a deferred payment program for up to three-quarters of monthly electricity billing depending on the price of commodities.
At the end of June, Imperial Metals owed $73.5 million to the utility company. Of that, $51.4 million is to partially reimburse BC Hydro for the cost of building the controversial $736 million Northwest Transmission Line, with the remaining $22.1 million for deferred electricity costs.
But Lapointe said that if Imperial Metals does end up collapsing, another company could come along, strip it of valuable assets and leave clean-up for governments.
“Even by clearing the debt away by folding it into bankruptcy, the projects may be so marginal and high cost that the new company will be able to run the mine again for four or five years and then call it off again,” he said.
‘It’s a very tense relationship’
It didn’t have to happen like this.
Skuce said that the mining rules in Alaska and Quebec require full payment within two or three years of a mine opening, which limits public liability and dissuades high-risk projects from proceeding.
Lapointe said that Quebec’s new measures, introduced in 2013, require half of securities to be paid during the permitting process and the other half during the first two years of operation.
“Typically, the more financially risky a project or company is, the more risky it is for the environment and communities,” he said. “It’s pretty simple logic: they’re scrambling to survive. They’ll prioritize the money to survive, which is the operations and revenues. And they’ll often cut corners on everything else, including putting in place the best technologies or environmental practices or best design because they cost more money.”
Meanwhile, Mack said her community isn’t receiving regular updates from the company, and are instead instructed to check its website. But things aren’t up to date, she said, and information is often only available for a short period of time before it’s removed. As a result, she said that community meetings have dwindled from 150 people shortly after the disaster to only a handful of dedicated members.
“I would say it’s a very tense relationship,” she said. “A lot of people have stopped attending meetings out of frustration and anger.”