McWatters files reorganization plan (December 17, 2001)

McWatters Mining (MCW-T) has filed a plan of arrangement under the Companies’ Creditors Arrangement Act aimed getting a handle on its debt and resuming production at the Sigma-Lamaque open-pit gold mine in Val d’Or, Que.

Under a new business plan, which has yet to be approved, Quebec-government-owned Soquem has agreed to buy a 40% stake in Sigma-Lamaque for $10 million and to chip in $5.8 million for initial working capital requirements. In return, McWatters would transfer its rights to $17 million in financing from government investment agency Investissement Quebec and a $2.6-million term loan from Canada Economic Development, both of which have signed letters of intent. McWatters will also pitch in $8.8 million for initial and working capital requirements. McWatters and Soquem have agreed to form a limited partnership, with McWatters acting as operator.

An independent feasibility study concludes that development of Sigma-Lamaque requires an initial capital investment of $31 million, plus $44 million in capital expenditures over the next six years.

To return Sigma-Lamaque to production, the partners will expand the mill’s daily capacity to 5,000 tonnes. Additional plans entail significant prestripping and development of multiple working places.

Engineering and mill expansion would begin in the first quarter of 2002. Startup of the open-pit operations is envisaged for the second quarter of 2002, with full production scheduled for the second half of 2003.

Over seven years, gold production is pegged at 856,000 oz. at a total cash cost of US$212 per oz. McWatters figures that at an average gold price of US$270 per oz. for the period, Sigma-Lamaque’s operating cash flow would ring in at $123 million. McWatters would get $40 million of net cash flow.

McWatters permanently shut down underground operations in the third quarter of 2000, and Sigma-Lamaque’s remaining operations were closed in February 2001.

Under the reorganization plan, McWatters’ debt will fall to $4.4 million from the present $30.2 million. The company’s banks would receive $2.4 million up front; the remaining $4.4 million owed would be paid in instalments between March 2004 and December 2005.

Holders of McWatters’ secured debentures would get a total of $1.4 million in cash plus $960,000 in a new series of gold-linked convertible debentures, with interest based on the price of gold. The unsecured debentures would be due Jan. 1, 2012, and would rank equally with McWatters other senior unsecured debt. The debentures would be convertible into new shares of McWatters at 13 apiece at any time. The company would have an annual repurchase obligation under certain circumstances, and the debentures would become redeemable after Jan. 1, 2005.

McWatters’ other secured creditors would get $2.8 million in cash. The company’s unsecured creditors and senior unsecured note-holders would have a maximum of half the value of their claims converted into McWatters’ new shares at the rate of 10 apiece. In all, the unsecured group could receive no more than 148 million new shares, which would be distributed on a pro rata basis.

Unsecured claims of less than $2,000 would be repaid out of $200,000 set aside by the company. Creditors who are owed more than $2,000 could dip into the cash pool by renouncing any part of their claim exceeding $2,000.

Each preferred share outstanding at the record date of the plan would be exchanged for 1.29388 new shares; each common share would be converted to 0.28122 new shares.

The plan is subject to shareholder, creditor, court and regulatory approval. Meetings for shareholders and creditors are both slated for Jan. 23, 2002. If approved, the plan would result in McWatters’ existing common and preferred shareholders holding about 25% of the company; unsecured creditors would have about 75%.

If the plan is approved, McWatters will issue one right for every new share issued under the plan. For $1,000 and 16,416 rights, a holder can buy one gold-linked debenture. McWatters says it has letters of intent from investors who have agreed to pony up for $12 million of the gold-linked debentures; the proceeds will go toward settling the secured claims and implementing the plan.

McWatters also notes that its senior officers have agreed to cut their base salaries by 10-20% over the next two years.

Says McWatters Chief Executive Officer Claire Derome: “We recognize how difficult creditors will find the prospect of a compromise of their claims against the company and how difficult shareholders will find the significant reduction of their interest in the company. This restructuring plan nevertheless presents greater benefit to creditors and shareholders than the outcome of a forced liquidation of the company’s assets.”

McWatters says that if the reorganization goes ahead, it will carry out an exploration program aimed at extending the life of its nearby underground Kiena gold mine. During the recent third quarter, Kiena, the company’s sole producer, churned out 18,332 oz. gold at US$223 per oz.