Interest Expense Likely to Decline With Refinancing for TCM:
Summary
- Thompson Creek will likely not generate enough cash flow to repay off its debts in full by maturity.
- However, Thompson Creek is now seen as lower risk by the debt markets as shown by declining yields on its bonds.
- Thompson Creek should have minimal trouble refinancing its debt and will likely do so at lower rates.
- Refinancing may create annual savings of over $20 million in interest with the same debt load.
One item that has been brought up before regarding Thompson Creek (NYSE:TC) is that it has a large ($900 million) amount of debt maturing between 2017 and 2019, and that it will likely not generate enough cash flow to repay its debt.
It is likely true that Thompson Creek will not be able to entirely repay its debt via the cash flow it generates over the next few years unless metal prices increase significantly. However, the performance of Thompson Creek's bonds indicates that it should be able to refinance its debt fairly easily, as Thompson Creek is considered to be lower risk by the debt markets now compared to before it completed Mount Milligan.
Bond Yields Falling
A strong indicator that the debt markets view Thompson Creek as a lower risk now (compared to when it was attempting to finance the development of Mount Milligan) is shown by the declining yields to maturity on its existing debt. Thompson Creek's bonds have surged in value now that Mount Milligan in operation. Its 9.75% Senior Secured 2017 Notes are now yielding around 4.2% based on latest trading, while its 7.375% Senior Unsecured 2018 Notes are yielding 7.3% and its 12.5% Senior Unsecured 2019 Notes are yielding 8.0%.
Below is a chart for its 9.75% Senior Secured 2017 Notes. The yield was around 7% to 8% in 2013 before Mount Milligan started production. Now it is approximately 4.2%.
Source: FINRA
There were serious concerns before that Thompson Creek would run out of money it could complete Mount Milligan, reflected in the very high rates for its 2017 and 2019 Notes (issued in 2012). Although the yields on its unsecured debt are still high, they have come down significantly to approximately 7% to 8% now. Below is a chart for the 12.5% 2019 Notes.
Companies in a significantly worse financial situation [such as Walter Energy (NYSE:WLT)] have been able to raise additional financing, so I do not believe that Thompson Creek will face difficulties in refinancing its debt unless there is a marked decline in metal prices. At current metal prices, Thompson Creek should be able to produce over $200 million per year in EBITDA once Mount Milligan is fully ramped up (and assuming its Thompson Creek mine is on care and maintenance). This would bring its debt/EBITDA ratio down to around 4.5x, which is still high but probably enough to improve debt ratings similar to S&P's upgrade in June.
The Refinancing Opportunity
Refinancing gives Thompson Creek the opportunity to reduce its interest expense, as the rates that it would get now would likely be substantially better than the rates it received for its current debt. Annual interest on its 2017, 2018 and 2019 notes is approximately $85 million currently.
|
Type
|
Interest Rate
|
Debt ($ Million)
|
Interest ($ Million)
|
|
2017 Notes
|
9.75%
|
$350
|
$34.13
|
|
2018 Notes
|
7.375%
|
$350
|
$25.81
|
|
2019 Notes
|
12.50%
|
$200
|
$25.00
|
|
Total
|
9.44%
|
$900
|
$84.94
|
If Thompson Creek was able to refinance its $350 million in secured debt at an interest rate of 5.5% and $550 million in unsecured debt at an interest rate of 8.0%, then annual interest payments would drop by nearly $22 million. This assumes interest rates that are still somewhat above what Thompson Creek's debt is currently yielding.
|
Type
|
Interest Rate
|
Debt ($ Million)
|
Interest ($ Million)
|
|
Secured
|
5.5%
|
$350
|
$19.25
|
|
Unsecured
|
8.0%
|
$550
|
$44.00
|
|
Total
|
7.22%
|
$900
|
$63.25
|
There are of course risks that general interest rates will rise before Thompson Creek refinances, or that metal prices decline, weakening Thompson Creek's ability to deliver positive cash flow (and also increasing the interest rate that Thompson Creek is likely to pay). However, as the situation currently stands, Thompson Creek is likely to be able to refinance at lower rates now that Mount Milligan is operational. If metal prices improve, Thompson Creek may be able to get even better rates once Mount Milligan is fully ramped up. Management indicated that it would look at refinancing opportunities as its credit ratings improved.
Conclusion
Thompson Creek is probably not going to be able to generate sufficient cash flow to fully pay off its existing debt by the time it matures. However, Thompson Creek is largely seen as lower risk by the debt markets compared to when it sought financing in 2011 and 2012. Credit ratings have shown some improvement and yields on Thompson Creek's existing bonds have declined substantially. Refinancing is likely to be fairly easy to obtain, and likely to be at rates lower than its existing debt. This could potentially result in savings from reduced interest of over $20 million per year once the refinancing occurs.