The past several years have not been kind to commodities exploration companies. The price of gold dropped to $1,051/oz. in November 2015, a level that had not been seen since 2009. Although the price of gold rebounded somewhat in January and February 2016 to just over $1,200/oz., the price has steadily decreased after peaking at $1,921/oz. in August 2011. The price of silver has also decreased dramatically, with its price off 60% from the 2011 highs. Copper has not escaped this trend, and was recently selling for just over half of its 2011 price.
The difficult pricing environment has taken a toll on exploration companies. These companies often require large capital investments to cover the significant costs of mineral rights acquisitions, heavy equipment purchases and leases, securities regulatory compliance, environmental compliance and mine development expenses. When borrowings are underwritten in a strong commodities pricing environment, as was the case during the bull market that ended in 2011, prolonged price decreases can make it difficult to service that debt. Also, many exploration companies’ potential revenues are largely speculative because they have no operating cash flows. Weak metals prices can derail such companies’ long term strategies, which often rely on partnering with established production companies or selling proven properties.
With little or no cash flow and without viable exit strategies, many exploration companies are now insolvent or nearly insolvent and struggling. Over the past several years, a number of gold exploration companies have filed for bankruptcy protection in the U.S., including Veris Gold Corp. (Jun. 9, 2014, Chapter 15 Case No. 14-51015, Bankr. D. Nev.); Allied Nevada Gold Corp. (Mar. 10, 2015, Chapter 11 Case No. 15-10503, Bankr. D. Del.); Midway Gold Corp. (Jun. 22, 2015, Chapter 11 Case No. 15-16835, Bankr. D. Colo.); Santa Fe Gold Corp. (Aug. 26, 2015, Chapter 11 Case No. 15-11761, Bankr. D. Del.); and Atna Resources, Inc. (Nov. 18, 2015, Chapter 11 Case No. 15-22848, Bankr. D. Colo.). Absent a prolonged rebound in the price of gold and other minerals, more mining and exploration companies are sure to follow.
When exploration companies file for bankruptcy, the restructuring goals generally include reducing long term debt, selling assets, mothballing or decommissioning unprofitable producing mines, eliminating onerous contracts and underutilized equipment, and reducing corporate overhead. In many ways, these are no different than the goals of companies in bankruptcy in any other industry. There are, however, several issues that tend to arise more often in exploration company bankruptcies when compared to other types of companies.
Cross Border Issues
Regardless of where the primary mining operations are located, a large majority of mining exploration companies are publicly traded on Canada’s TSX Venture Exchange and are registered with a Canadian address. The TSX-V has capitalization requirements that are favorable to these companies, allowing them easy access to public equity markets for financing. Around 70% of the 2,350 companies listed on the TSX-V are exploration companies.
Exploration companies, which usually are registered in Canada but may have substantial assets in the United States, often simultaneously file insolvency cases in both the U.S. and Canada. Determining which country’s courts will oversee the main bankruptcy case is an issue that these companies must carefully evaluate with counsel. Companies that decide to file a main case under either Chapter 7 or Chapter 11 in the U.S. will generally also file an ancillary petition in Canada under the Companies’ Creditors Arrangement Act (CCAA) and ask the Canadian court to recognize the U.S. case as the main proceeding. The Canadian court will appoint a monitor who will assist the Canadian court to carefully oversee the debtor but will generally defer to the U.S. court’s authority in most instances.
Companies that file a main proceeding under the CCAA will generally also file a Chapter 15 case in the U.S. and ask the U.S. bankruptcy court to recognize the Canadian case as the main proceeding. In these cases, the U.S. court plays a secondary role, recognizing some orders from the Canadian court but deferring to the Canadian court in most instances. In either case, the company will need to retain both U.S. and Canadian insolvency professionals and must fulfil reporting and other requirements in both cases. Also, the company typically will be delisted from the TSX-V, resulting in a somewhat reduced compliance burden going forward.
Exploration company insolvencies may implicate other cross-border issues as well. For example, the company’s cash management system may involve bank accounts on both sides of the border and the court presiding over the main processing may impose restrictions on the amount of cash that can be held outside of the country of the main proceeding.
Land and Equipment Leases
Exploration companies tend to have a large number of land and equipment leases. Leases for mining properties are complex compared to other real property leases and can cover thousands of individual continuous claims. For exploration companies, mining leases are often their most valuable assets. Insolvent companies and their advisors must carefully review all real property leases to understand the rights and obligations of the debtor in bankruptcy and to evaluate whether such leases should be the subject of an assumption or rejection.
These companies also tend to lease a lot of heavy equipment, including bulldozers, digging equipment, fuel trucks, drilling equipment and laboratory equipment. As operations are reduced and assets sold in bankruptcy, it is important that the debtor evaluates all equipment leases for assumption and assignment or rejection. It is also important to review equipment leases to determine if any constitute secured financings rather than true leases.
Mechanics’ Liens and Recording Statutes
Exploration companies usually have a number of mechanic’s or other statutory liens asserted against them. Mechanics liens can be a powerful tool allowing contractors and others who improve the debtor’s property to enforce a lien that in some cases is superior to prior recorded liens that may be held by secured lenders. However, mechanic’s liens are governed by state statute and strict compliance with the statute by the purported lien holder is often required. Failing to meet a deadline or correctly record and deliver notice of a lien can result in removal or “expungement.” It is important that insolvent companies evaluate any asserted mechanics liens to determine their validity and the possible implications for the debtor and creditors at various levels of the debtor’s capital structure. It should also be noted that mechanic’s lien holders are exempt from certain aspects of the automatic stay under section 362(b) of the bankruptcy code.
Exploration company insolvencies are complex and require specialized expertise to address certain issues unique to these cases. The above discussion merely scratches the surface and describes just a few of those issues.