Australian mining company MinQuest says it will try to put the Wolverine mine back into production within six months if it’s given the chance to buy the mine from Yukon Zinc. That means Yukon Zinc’s creditors now have to choose between getting a fraction of the money they’re owed right away, and the possibility of being employed by Wolverine again in the near future.
MinQuest went public with its bid to buy Wolverine last month, at the time saying it didn’t have plans for the underground mine itself. Instead, it planned to use the mill and tailings facilities at Wolverine to fast-track the development of its Fyre Lake copper project, located 28 kilometres southwest of the Wolverine mine.
But now, managing director Jeremy Read says the company is interested in operating the Wolverine mine for two or three more years – the time it would take to get Fyre Lake into production.
“We have a vision and a plan that will hopefully extend over a 10-year period,” he said.
MinQuest is in a bit of a tight spot at the moment. It still has to secure financing before it can finalize a purchase agreement with Yukon Zinc – about $20 million upfront and another $6 or $8 million to put the mine back into production, Read said.
And it has to do that even though Yukon Zinc sees its bid as a back-up option in case creditors vote down a restructuring plan it proposed last week.
Read said he didn’t realize until Yukon Zinc’s court appearance last Friday that MinQuest’s offer was only a back-up.
“We were approaching it from the perspective that ours would be presented alongside the Yukon Zinc plan,” he said. “It makes it a little bit more difficult for us to conclude financing.”
But he said MinQuest is in “quite advanced discussions” with a number of potential investors.
This means Yukon Zinc’s creditors now have an interesting choice to make. Yukon Zinc’s restructuring plan would pay off the full debt to any creditor owed less than $5,000, and either $5,000 or up to 11.5 cents on the dollar to any creditor owed more. If the creditors refuse the plan, Yukon Zinc would likely be forced to sell to MinQuest, and the unsecured creditors would probably get nothing from the sale.
So creditors now have to choose – take the deal as it stands and see the mine remain closed at least until metal prices rebound, as Yukon Zinc is proposing, or refuse the deal and take a chance on a junior mining company that says it will try to get the mine running again right away.
And whatever they decide, they have to do it quickly. Creditors voting for the plan need to respond to Yukon Zinc’s offer by Aug. 31 if they want to get the best deal available. The final vote on the plan will take place on Sept. 2.
David Green, owner of MacPherson Rentals in Whitehorse, said he’s already decided to take Yukon Zinc’s deal. Yukon Zinc owes his company about $63,000 for equipment rentals, so he plans to take 11.5 cents on the dollar, which would get him about $7,200.
Green said he’s had clients go bankrupt before, and this is the first time a client in financial difficulty has been able to pay anything back at all.
“The plan’s not unreasonable for what we would expect,” he said.
He also said he’s not convinced MinQuest will be able to deliver on its promises.
“I think that any development of the MinQuest project would be a number of years away… because of the current commodity cycle. They need to raise a lot of money,” he said. “I think that the probability of getting any money out of the MinQuest proposal in the foreseeable future is way lower than what the plan of arrangement is.”
But according to one lawyer involved in the case, Yukon Zinc’s plan is not really what creditor protection is supposed to achieve.
Jonathan Williams represents the three prospectors who discovered the Wolverine deposit, and whose royalty payments were recently threatened by Yukon Zinc. The court has now ordered that those payments be maintained if the mine goes back into production. But Williams’ clients are still among the unsecured creditors, for outstanding royalty payments.
Williams said an ideal creditor protection scenario is one where a company needs to reduce its debt to keep operating. In that situation, a financier would step in to refinance the operation. Creditors would get a fraction of the amount they’re owed, but that would allow the company to keep them employed.
But in this case, he said, all Yukon Zinc is doing is “reducing debt and putting this thing into mothballs.”
“[Creditor protection] is legislation that is intended to provide a social benefit to creditors and the community by allowing a company to restructure,” he said. “What bothers me about this so-called restructuring is that it’s not really a restructuring. There’s very little community benefit to what is going on here. That’s what I find somewhat distasteful.”
Currently, to file for creditor protection, companies have to have at least $5 million of debt, and they have to show that their liabilities outweigh their assets. But Williams said they should also have to show what benefit creditor protection will provide to the community.
For his part, Green believes some money back is better than none. But he’s also surprised Yukon Zinc had to file for creditor protection in the first place. He said he’d always believed JDC Canada, Yukon Zinc’s parent company, would support the mining company through financial difficulties. That was part of the reason he kept dealing with Yukon Zinc.
“I had made a calculated assumption that they would stand behind the company,” he said. “I’m still surprised that they walked away from that.”
JDC Canada didn’t exactly walk away, however. Yukon Zinc owed its parent company over $600 million when it went into creditor protection in March. Now, JDC Canada has agreed to finance Yukon Zinc’s restructuring plan – a plan that will see it pay out roughly $24.5 million less than the total amount owed to unsecured creditors.
Williams said that in creditor protection proceedings involving a wealthy parent company, it’s always difficult to know how far that parent is willing to go. In this case, he said, it’s hard to know whether JDC Canada would have let Yukon Zinc go bankrupt if creditor protection had not been an option.
And now, he said, it’s hard to know if this deal is the best the creditors can get from JDC Canada.
“I wonder… whether JDC would be willing to put up more money to avoid a bankruptcy,” he said. “But unless the creditors got together and formed a committee and entered into negotiations with these guys, we won’t know that.”
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