Analysis on Q2I listened to the conference call, read the filings and came to the following realization.
According to their disclosures, they have a revolving credit facility that matures next year of $70 million. $53 million is drawn (cash plus LCs). They breached their EBITDA covenants but managed to get a waiver from the banks. But they also talked about a minimum cash covenant, that requires they have to have at least $83 million of cash outside of Cuba. As at June 30, they had $99 million of cash outside of Cuba. BUT here is the thing…..
It looks like they declared a dividend of ~$34 million (their share $17 million) from Moa, which they said used the bulk of the cash in Moa. It looks like this was done so the Cubans could pre-pay $12 million of receivables in Q2 that were due in Q3. I suspect there was agreement to pay the Moa dividend so that the Cubans would pre-pay $12 million of receivables and keep the $5 million balance. Why? Because if that had not happened, the company would have breached its minimum cash covenant. Banks will waive EBITDA covenants, but unlikely they will waive a minimum cash covenant, as that is there security. They also got some cash from the sale of Pakistan. They don’t disclose how much but I am guessing ~$2 million based on value in AIF.
So, next quarter, no-to-little dividends from Moa, no overdue collections of receivables from Cuba due to prepayment (as per CFO) and they are drilling Block 10 at $4 million/month, so expect at least another $8 million capex for Block 10.
The company played financial games to make the quarter look good, but they are heading for a major bank default this quarter or next – without question.
Nickel prices can’t save them in time, and Block 10 is a bust whether oil is found or not. On call “Pathetic” said the well will need to be tested for months and they will not drill another well until they have certainty on receivables. How much was this first well? I am conservatively thinking $40 million. They can’t afford another well and who will partner after one well in complex geology for heavy oil (ie. not exportable) in a country where the only customer cannot afford to pay for the oil. If they find oil, it is like owning a fancy sports car in the middle of the outback and not being able to afford to fill up the gas tank!!
IMO, the shares are headed towards zero and the debtholders are the only ones that will salvage any value. People can talk nickel inventories and recoveries all day, but they will not survive long enough to see the dawn!