Win us with honest trifles

Capstone (CS.to) decides that it needs more senior debt

The move announced this morning is that Capstone (CS.to) is taking the $298.369m senior debt on its books as at end 3q14 (which is probably down to at most $276m now because CS had a quarterly payment to meet between then and now) and replacing it with a $440m facility that can expand to $500m if some criteria are met. So the essence of the thing is that CS.to has breathed about $160m of liquidity life into its structure, which expand to $220m if necessary. Let’s see what Capstone’s CEO had to say about the move in the NR today:
“This low-cost credit facility, combined with our existing cash balance and cash flow from operations, offers Capstone significant financial flexibility to meet our operating requirements and to address potential market or operational disruptions, including periods of low copper prices,” said Darren Pylot , President and CEO of Capstone. 

“We expect to draw approximately $265 million once the standard conditions precedents are met. This will replace our current borrowings and will eliminate our requirement for amortization, leaving us with approximately $235 million of additional credit capacity. At the same time, we maintain the option to access the high yield bond market when conditions improve if that is still appropriate for Capstone at the time.”

Parsing that:
1) This low cost credit facility is at LIBOR +3% and a standby fee of 0.675%. It replaces a credit facility priced at LIBOR +2.5% and a standby fee of 0.56%. So it may be “low cost”, but perhaps a better definition is “more cost than it used to be”.
2) CS.to had $169.933m cash as at end 3q14. How much of that is “existing” cash and how much of that is “exiting” cash under the new copper price will be seen when Capstone reports its next couple of quarters. 
3) As for cash flow from operations, again we check the 3q14 filings and note that from revenues of $183.824m, CS.to reported earnings from operations (i.e. before the financials section kicks in, interest and tax and all that jazz) of $16.874m. It did this by producing copper at $1.84/lb cash cost and selling it at an average of $2.98/lb. Now I may not be the sharpest stick, but if you slice just 10% off that average copper selling price by my Casio it’s not going to leave much in the way of op-earnings. Basically, it looks as though out intrepid CEO Pylot is stretching things a bit far by  combining the new facilities’ benefits with “cash flow from operations” in order to underscore the wellbeing of his company.
4) The $265m draw makes sense; they know their books better than us and that’ll cover the current secured facility. Therefore $175m-$235m is what they’ve added to the liquidity pile. They’ll underscore $235m, but there must be a reason why the banks haven’t lent $500m but have lent $440-with-facility-to-500. I’ll stick with the low end number, thanks.
Bottom line: CS.to’s share price has been decimated recently by the combo of dropping copper prices, a poor operational 2014 that missed guidance, plus the idiocy of a CEO who tried to pretend that everything was cool when it obviously was not. The company is facing a potential cash crunch in the medium-term if copper doesn’t rebound immediately (and it certainly has no cash to develop the overpriced Santo Domingo project) so it’s decided to head off the problem now and raise via debt (after what happened to the share price, there was no chance of raising via equity without a full-on rebellion against CEO Pylot). As business decisions go it’s conservative and there is logic there, but it’s taken another slug of share price upside potential away from the company and it’s now looking heavily in the hands of (aka at the mercy of) the banks. Its market cap is now the same as its financial senior debt, give or take a million or two. 
CS.to filed a small net loss on operations in 3q14 when copper was at $2.98/lb. Is there any reason to own this with copper at $2.60/lb and a dog’s dinner of a balance sheet? I think not, so financial stability via new loans or not steer well clear of this one, at best it’ll underperform peers if the sector rebounds, at worst its equity price will be crushed between the jaws of rising debt and writedowns. 

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