Report: Contingency planning at the coalface
Authors: Will Gunston, Anna Pukszto, Robert Richards and John Sandrelli
Over the past 10 years there has been significant financial distress in the mining industry.
A number of mining companies have filed for bankruptcy, insolvency, administration or restructuring protection throughout the world, and industry specialists suggest there will be ongoing financial distress in the industry.
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Factors contributing to this include falling commodity prices, more challenging and uncertain regulatory regimes, more vociferous local community objections, an increased tax burden, and a weaker global economy leading to a reduction in demand, as seen in cases such as those involving James River Coal Company, Veris Gold Group and Patriot Coal Corp – which first filed for bankruptcy protection in 2012 and then again in 2015.
Even when mining operations have been relatively stable, other factors – such as overleveraged debt or high capital expenditure costs to meet new regulatory requirements – can lead to corporate or debt restructuring through divestments, joint ventures, and increased diversification in business divisions.
Common elements in restructuring and insolvency regimes
Given this background and the increasingly hostile environment facing mining companies worldwide, it is imperative for those in the mining industry to understand the benefits and challenges of the various insolvency processes in different jurisdictions.
Restructuring processes can vary widely among countries, but certain similar procedures, structures, and protections are pervasive in most countries’ insolvency legal structures.
Insolvency proceedings in most jurisdictions are either voluntary or involuntary. Voluntary proceedings are usually commenced by the insolvent company through a vote of its governing board or entity. In some jurisdictions, involuntary proceedings may be initiated by the distressed company’s creditors or other stakeholders.
In many jurisdictions, when a company becomes the subject of bankruptcy or insolvency relief, the control and management of the company is transferred to a third-party trustee, liquidator, administrator or receiver who manages and oversees the company’s affairs.
In certain other jurisdictions, the company’s existing board of directors is permitted to remain in charge and manage its day-to-day affairs, such as in Chapter 11 proceedings in the US or protection via the Companies’ Creditors Arrangement Act (CCAA) in Canada.
Permission in these circumstances is subject to court supervision, and applies in the absence of fraud, dishonesty or gross incompetence. In other jurisdictions, the process is sometimes more creditor-driven with the control of the company being taken over by an administrator, monitor or receiver, with such individuals often being accountants or lawyers in firms that specialize in insolvency.
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When a company initiates an insolvency proceeding, many countries’ legal schemes provide for a type of injunction, moratorium or stay that protects the debtor and its assets, and prevents the debtor’s creditors or other stakeholders from taking certain adverse actions against the debtor, such as trying to collect on its claims against the debtor or commencing any proceeding against the debtor.
"Even when mining operations have been relatively stable, other factors can lead to corporate or debt restructuring through divestments, joint ventures, and increased diversification in business divisions."
A key issue in reorganization or insolvency proceedings is the impact of these proceedings on the debtor’s contractual obligations. The insolvency regimes of certain jurisdictions provide the debtor, or a third party managing the debtor, with the opportunity to determine whether to assume the debtor’s existing contractual obligations, or to rescind or modify them.
In other jurisdictions, such as the UK, the appointment of an insolvency practitioner, such as an administrator or liquidator, does not, as a general rule, automatically terminate a contract unless the contract specifically provides for termination. A UK liquidator, however, can disclaim "onerous property", which includes unprofitable contracts and land interests to which liabilities attach.
The effect of a disclaimer is to terminate the debtor’s obligation to perform the contract or, in the case of onerous land interests, for liabilities to pass to the owner of the land and, where the owner cannot be found, to the state, and to turn the debtor’s counterparties’ rights into a right to prove for a dividend in the liquidation.
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Also, should a company in liquidation have a viable business to sell, the transaction may be effected through an expedited court-driven procedure, known as a ‘center-bind’ transaction.
Different creditors are entitled to different priorities with regards to distribution of any proceeds arising from transactions, or the sale of company or its assets in bankruptcy and insolvency proceedings.
To some extent, the ranking of these priorities vary from jurisdiction to jurisdiction. Distributions to creditors are sometimes governed by the “absolute priority rule,” which provides that creditors are ranked according to the relative priority or rights to receive payment and that no lower or inferior class may receive or retain any property unless the class above is being paid in full (or all affected classes of claims agree otherwise).
The general ranking of claims in most cases, from highest to lowest, is: (i) secured claims; (ii) any super priority claims; (iii) costs of administering the proceeding and conducting business post-filing (including certain claims of vendors); (iv) priority unsecured claims; (v) general unsecured claims; and (vi) equity interests.
Since many mining companies have operations that transcend national borders, it is also important to understand how the legal schemes between jurisdictions interact with one another.
The UNCITRAL Model Law on Cross-border Insolvency provides a framework of legislation that sets out when a country’s national courts must recognize insolvency proceedings that have been initiated in a different country.
Following recognition, the court may provide certain assistance to the foreign insolvency office holder. The Model Law does not attempt a substantive unification of insolvency law and any country can choose whether and how to implement it. At least 18 jurisdictions, including Australia, Canada, Colombia, Japan, Mexico, New Zealand, Poland, South Africa, the UK, and the US have adopted it in some form. Recent examples include Redcorp Ventures and Veris Gold Group, each of which filed CCAA proceedings in Canada with parallel Chapter 15 cases in the US.
Special issues in mining proceedings
Mining companies filing for bankruptcy or insolvency protection face certain unique challenges. One of these challenges is dealing with what are deemed as "critical vendors" or "business critical suppliers," which are suppliers of goods or services that are essential to the debtor’s business. In the context of mining restructuring cases, these suppliers may include safety equipment suppliers, service providers, environmental testing providers, fuel and lubricant providers and specialist mining related equipment suppliers. The standards for critical vendor treatment vary from country to country.
"Mining companies in bankruptcy must also deal with costly environmental claims and clean-up costs.”
Another issue that faces many mining companies in restructuring proceedings relates to payment and treatment of significant unsecured claims arising from retiree health and pension obligations.
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In the US, the mining industry is unique in that, unlike many industries, it is subject to federal legislation requiring payment of such retirees’ claims, including under the Coal Industry Retiree Health Benefit Act and the Black Lungs Benefit Act.
In many mining bankruptcy cases, the debtor seeks to shed some of its employee obligations to current employees and retirees and will need to heavily negotiate with union representatives in the process of doing so.
For example, in the first Patriot Coal case, the company cited US$1.6 billion in lifetime healthcare obligations owed to its retirees in a bid to obtain Bankruptcy Court approval to reject its contracts with the United Mine Workers of America (UMWA) and modify the benefits inherent within the existing collective bargaining agreements.
Mining companies in bankruptcy must also deal with costly environmental claims and clean-up costs. These clean-up costs can be very sizeable. There may also be environmental or similar claims by adjacent landowners or residents.
Finally, as for an exit to insolvency cases, it is noted that in certain countries, the sale of assets free and clear of certain liens and claims can be carried out pursuant to a court order. Especially where the bidder is able to pay cash and close quickly, the assets may also be available at a very attractive price. The sale process often involves a relatively abbreviated marketing process and an opportunity for competing bids to be submitted.
The initial or "stalking horse" bidder can sometimes receive certain inducements such as a break-up fee or reimbursement of its diligence and negotiation expenses in consideration for providing a floor negotiated bid with a baseline price.
For large mining companies, severe price falls have resulted in billions of dollars of asset value write downs, large annual losses, urgent cost-cutting and tight cash flows, making it difficult to pay down debts. Smaller mining companies, with as little as one asset, often do not have the option to restructure their balance sheet and are either sold or liquidated.
However, both large and small mining companies would benefit from becoming more familiar with insolvency procedures in those jurisdictions in which they operate so that they are equipped with the tools for appropriate contingency planning.
Other parties which may be affected by distress in the mining industry and would benefit from a better understanding of the process include: vendors and service providers; investors; unions; pension funds and government administrators.
*Will Gunston is a London-based partner, Anna Pukszto is a partner in the Warsaw office, Robert Richards is a partner in Chicago and John Sandrelli is a partner in the Vancouver office of Dentons.
Copper, iron ore surge as Chinese investors unleash demand
The reopening of major industrial economies is sparking a surge across commodities markets from corn to lumber, with tin climbing above $30,000 a tonne for the first time since 2011 on Thursday.
In the wake of mounting evidence of inflation fuelled by higher raw materials prices, investors are also increasingly focused on when the U.S. Federal Reserve might start throttling back its emergency support.
Many banks say the rally has further to run, particularly for copper, which will benefit from rising investment in new energy sectors. Copper is at the highest in a decade, fueling bets it will rally further to take out the record set in February 2011. Steel demand is surging as economies chart a path back to growth just as the world’s biggest miners have been hampered by operational issues, tightening ore supply.
“The long-term prospects for metals prices are ‘too good’ and point to higher prices in the next few years,” said Commerzbank AG analyst Daniel Briesemann. “The decarbonization trends in many countries, which include switching to electric vehicles and expanding wind and solar power, are likely to generate additional demand for metals.”
Trading house Trafigura Group and several major Wall Street banks including Goldman Sachs Group Inc. and Bank of America Corp. expect copper to extend gains.
Copper rose as much as 1.6% to $10,108.50 a ton on the London Metal Exchange before trading at $10,080 as of 4:07 p.m. in London.
Benchmark spot iron ore prices rose to a record, while futures in Singapore and China climbed.
The boom comes as China’s steelmakers keep output rates above 1 billion tons a year, despite a swath of production curbs aimed at reducing carbon emissions and reining in supply. Instead, those measures have boosted steel prices and profitability at mills, allowing them to better accommodate higher iron ore costs.
Spot iron ore with 62% content hit $201.15 a ton on Thursday, according to Mysteel. Futures in Singapore jumped as much as 5.1% to $196.40 a ton, the highest since contracts were launched in 2013. In Dalian, prices closed 8.8% higher.
Erik Hedborg, Principal Analyst, Steel at CRU Group commented: “Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise. Iron ore producers are enjoying exceptionally high margins as well, around two thirds of seaborne supply only require prices of $50 /dmt to break even.”
Still, some analysts including Commerzbank’s Briesemann expect a short-term correction as metals become detached from fundamentals. There’s also a risk that China could engage in policies that may cool demand for iron ore and copper.
The metals rally has boosted concerns about short-term Chinese demand. Some manufacturers and end-users have been slowing production or pushing back delivery times after costs surged, while weaker-than-expected domestic consumption has opened the arbitrage window for exports.
Tin climbed as much as 2% to $30,280 a ton on the LME, boosted by rising orders for the soldering metal. Tin is at the highest since May 2011, with a 48% gain this year making it the best performing metal on the LME.