Advice for boards & management facing financial distress
Mining companies in Canada continue to face challenging markets. Tough decisions sometimes need to be made, including potentially idling mining projects or restructuring a company. If financial distress or insolvency is looming, boards and management should add the following to their “to do” list.
Forward planning is critical. While you must know in detail what the near term looks like, the focus should be on long term solutions. Occasionally, a bridge financing or a temporary “fix” is found and implemented. But sometimes these temporary fixes make longer term solutions even more difficult to implement and potentially deprive the company of its best alternatives.
There is a long lead time for any type of financing, extension, forbearance or restructuring. Lenders and other stakeholders don’t like surprises, and will be justifiably critical if management has not assembled the appropriate information and explored alternatives.
Forward planning requires a full understanding of options for selling assets, downsizing, or putting certain operations on a ‘care and maintenance’ program. Reliable and current information is needed in order to know what is possible and what is not. For example, life of mine analyses may need to be up-dated, cash flow forecasts should be prepared and tested, and collective bargaining and employment agreements should be reviewed.
Get familiar with your company’s loan and security documents. Assess what defaults may occur and when (consider what can be remedied or not) and what strategies can be used to obtain any waivers or extensions.
Understand the remedies available to your creditors, and what options are available to the company if these remedies are taken. Understand the company’s history with its creditors, so that you can judge if they will be amenable to discussions, or if they will be aggressive in their actions. If you want to restructure loan or security documents, you must understand how this can be done by agreement, or by proceedings if necessary.
Compliance (or the failure to comply) with environmental laws is of particular importance to mining companies. Evaluate the company’s operational and historic environmental risks. Estimate the company’s future costs of remediation. Are existing financial assurances adequate to address the company’s obligations? Review the company’s environmental liability insurance policy (if it has one) and determine the scope of coverage.
If restructuring is required, consider the impact on environmental liability risks of proceeding by way of a restructuring process or bankruptcy, including whether any compromise or arrangement addresses potential claims against directors and officers.
Transfer assets, pay dividends, and undertake any non-arm’s length activity only after exceptionally careful scrutiny.
Examine which payables are critical and must be paid, and which payables can be deferred if necessary. If the company is contracting for goods and services, consider carefully if the suppliers will be paid. Avoid allegations that the company ordered or contracted for goods and services while knowing that it could not pay.
Public companies must be more diligent than ever with respect to public disclosure and statements.
Pay attention to potential personal liabilities.
Recent headline-grabbing cases in Canada have heightened the risk for directors and officers being held personally liable for contamination if a company is unable to undertake or fund environmental responsibilities including remediation of contaminated sites. Directors and officers may be liable even if they did not cause the contamination.
Directors and officers may be personally liable for unpaid wages, unremitted source deductions and unremitted sales taxes in certain cases. Payroll and remittance systems should be reviewed. Understand your obligations and how to avoid liability.
Review the company’s director and officer insurance and understand the scope of coverage and claim procedures.
An opportunity to bring stability
Although financial distress for a mining company is always stressful, and while a restructuring is a daunting process filled with potential risk, it is also an opportunity to bring stability to your company and resolve legacy issues. Your hard work and diligence, guided by solid professional advice, can yield positive results.
*Dawn Whittaker is a senior partner and the leader of Norton Rose Fulbright’s Canadian mining and commodities team.