Investors may be rewarded for picking up the defaulted notes of Midwest Vanadium Pty over the next 12 months as the company gets funding to revive its mining business, according to Independent Credit Research LLC.
The Australian miner missed a $19 million coupon payment to holders of its $335 million notes in February, following a fire at its Windimurra plant that month. It received a A$29.7 million ($27.8 million) loan to rebuild the project from its owner’s biggest shareholder Droxford International Ltd. on April 14, while bondholders agreed to a debt forbearance through Aug. 15.
The 11.5 percent note maturing in 2018 last traded at 55.875 cents on the dollar on April 14 to yield 30.17 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They fetched 64.25 cents a year earlier.
“I’m bullish on the value of the assets,” Stan Manoukian, founder of ICR, a California-based distressed debt research company, said by phone yesterday. “Droxford sees a lot of value in the project. Even if they have to invest another $100 million, the project is worth at least $1 billion in terms of the opportunity cost to build or finish it and the reserves.”
Midwest Vanadium, owned by Perth-based Atlantic Ltd., is the only default in Australia this year and one of 13 companies globally to have missed payments to bondholders through April 9, according to Standard & Poor’s. There are 75 percent odds the company’s bonds will be restructured because the Windimurra project remains undercapitalized, Manoukian said.
The Droxford loan is for working capital and to partly repay creditors, Terry Bourke, a general counsel for Atlantic, said by e-mail today. Money from the business-interruption claim from its insurance policy relating to the fire in February is providing daily financing for post-fire expenses, he said.
“Midwest Vanadium has committed to use excess cash flow to repay the loan,” Bourke said. The company has made arrangements to convert any remaining portion of the Droxford loan into senior secured notes, and initiate a restructuring to strengthen the mining business, he said.
“The form of that restructuring has not yet been determined,” he said.
Atlantic, whose stock has been halted in Sydney since February, bought the plant in 2010 and achieved first production in January 2012, according to its website. The company targeted annual production of 6,300 metric tons in the first quarter of 2013 to meet about 7 percent of global demand before the fire damaged the facility this year.
The Perth mine contains an estimated 28 years of reserves in vanadium, which is used in steel and titanium manufacturing. Australian vanadium is sold to the U.S. under a free-trade agreement while producers from China, South Africa and Russia face anti-dumping duties, according to Atlantic. Ferrovanadium in the U.S. has climbed 8.8 percent this year through April 16 to $13.60 per pound, according to Metal Bulletin prices.
“The reason why the bonds are trading at these levels is because of the uncertainty about how long and how much it will take to rebuild the plant and to ramp up production,” Manoukian said.
While a debt restructuring may weigh on bond prices, any declines will likely attract new investors from among private-equity distressed funds, he said. As soon as the business revival plans become clearer over the next nine to 12 months, distressed debt investors will likely “run after” such an opportunity, he said.
Manoukian set up ICR in September 2009 after stints at companies including Guggenheim Capital, Bank of America Corp. and Pacific Investment Management Co., according to the firm’s website. His recommendations gained an average 28.4 percent in 2013 and 25.7 percent in 2012, according to notes to investors.
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