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Talvivaara Investors Face Dilution in Bond Payment Bid

Talvivaara Mining Co., the Finnish nickel miner beset by environmental problems and slipping production targets, may fail to raise new debt to repay a bond maturing next year.

Instead, the company whose debt exceeds its equity by 64 percent, may seek funding by selling new shares, leaving its existing owners worse off.

“It’s almost certain the company will have to carry out a strongly diluting rights issue or its creditors will take over the company through a debt restructuring,” Markus Liimatainen, an equity analyst at FIM Bank Oyj in Helsinki, said by phone on Nov. 12. “I don’t see them being able to issue a bond right now, other than perhaps a hybrid one with an extremely high interest rate.”

Talvivaara’s funding dilemma has been exacerbated by falling profits and reduced cash flow after nickel prices plunged to the lowest in three years. Heavy rains have also hampered production.

The Espoo, Finland-based company discovered a leak in its mine’s waste-water pond on Nov. 4 and today said it has stemmed the flow of liquid that contains nickel, zinc and 50 times more uranium than normal. Its metals production has been halted since the breach in the gypsum pond was found. The metal discharges may harm wildlife in the lakes, while the radiation levels pose no harm to humans.

Public Funds

Marko Kyyroenen, portfolio manager at Quorum Fund Management in Helsinki, is betting the public funds invested in the miner’s bonds mean the company won’t be allowed to fail. He holds the 5.25 percent 2013 securities and last added to the holding on Nov. 9.

“The bonds are stressed and yields remarkably high,” Kyyroenen said. “The company is in a complete crisis. The attractiveness of the bonds comes from its solid ownership base. I consider the risk of permanent closure almost non-existent.”

The leak follows production hurdles at the company, which said on Oct. 15 it was unlikely to meet a full-year target of 17,000 metric tons of nickel output because excess water at the Sotkamo mine had diluted metal grades in the leaching process.

Talvivaara has forecast that fourth-quarter production will be higher than the 4,030 tons in the third. That projection will be reviewed after a start-up date for production is known, the company said today. Shares rose 15 percent to 1.24 euros at the close in Helsinki. The stock has lost 50 percent in 2012. It gained 26 percent today in London trading.

Constant Dialogue

“We are looking into a range of financing options,” Saila Miettinen-Laehde, chief financial officer at Talvivaara, said yesterday by phone. “We are in constant dialogue” with “a wide variety of parties, not only bankers, a wide variety of contacts,” she said.

Talvivaara has 76.9 million euros ($97.9 million) of 5.25 percent senior unsecured securities maturing on May 20, and pays 29 million euros in interest on its debt this year and the next, according to data compiled by Bloomberg.

“The situation is challenging enough that issuing a traditional bond may be difficult, due to weak cash flow and high indebtedness,” Riikka Tuominen, a credit analyst at Nordea Bank AB in Helsinki, said in an interview yesterday. Refinancing the 2013 bond “will be quite tight, there’s not much leeway for negative surprises anymore,” she said.

Financing Options

Talvivaara said on Nov. 8 it is considering financing options, including debt, convertible bonds, royalty streams and equity. It hadn’t made a “formal decision,” according to its third-quarter earnings statement. Talvivaara’s total debt-to-equity ratio rose to 164 percent last quarter from 137 percent a year ago.

“Its balance sheet is already weak,” Liimatainen said. He recommends clients reduce holdings of the stock. “To lower gearing to 100 percent, Talvivaara needs about 150 million euros of cash.”

The yield on Talvivaara’s 2013 bond fell to 18.8 percent today from 20.7 percent yesterday. It yielded 12.6 percent a week ago and 5.9 percent on May 2. The company’s 4 percent 2015 bond also declined to 23.1 percent from yesterday’s 26 percent. That compares with a low of 9.56 percent on April 6. Talvivaara has 225 million euros of the securities outstanding.

“Debt investors are concerned that the company’s liquidity is not sufficient,” Tuominen at Nordea said. “Improving cash flow would pacify creditors.”

Default Risk

The company’s one-year default risk has risen to 3.92 percent, consistent with the second-lowest junk grade, according to the Bloomberg default risk scale. The risk was at 0.67 percent in December, signaling the top high-yield grade.

“Our first and foremost target right now is to stabilize the operational situation and hopefully start the plant as soon as possible, which will hopefully then generate us money rather than spending it,” Miettinen-Laehde said.

The cost of nickel has declined to $15,980 a metric ton on the London Metal Exchange from as high as $29,281 a ton on February 2011. Norilsk Nickel buys all of Talvivaara’s nickel and cobalt output in a 10-year contract and Nyrstar NV purchases zinc from the mine.

Talvivaara drew 70 million euros of its 130 million-euro revolving credit facility in September, breaching some covenant requirements, which were waived by banks, the company said on Nov. 8. It reported a net loss of 11.3 million euros last quarter, the third loss in a row.

Talvivaara postponed its investor meeting to an undisclosed date from Nov. 20 as it deals with the waste-water leak, according to the investor calendar on its website.

Biggest Owners

The company’s biggest holders include Chairman Pekka Pera, with 20.7 percent and Solidium Oy, which manages the shareholdings of the Finnish state. Pension funds Varma and Ilmarinen also hold stakes. Solidium declined to comment on Talvivaara’s funding, according to an e-mailed response to questions.

Talvivaara first sold shares in 2007 in London before seeking a secondary listing in Helsinki in 2009, and has never paid a dividend.

“Debt investors’ position is relatively better compared with shareholders, as we estimate that Talvivaara will seek extra share capital,” Kyyroenen said. “Dilution for old shareholders is coming.”

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