Mercator weighs its options

Mercator Minerals (TSX: ML; US-OTC: MLKKF) is delving into a strategic review that is considering any or all of the following: selling the company; a business combination; or selling all or part of its assets, in light of lower commodity prices and tighter access to capital.

The Vancouver-based firm has discussed the possibilities and signed confidentiality agreements, and has received non-binding proposals from several interested parties. But it won’t release details about its strategic alternatives “unless and until the board of directors has approved a specific transaction, or otherwise determines that disclosure is appropriate.” 

Mercator’s assets include the Mineral Park copper-molybdenum-silver mine in northwestern Arizona, along with the El Pilar copper project and the El Creston copper-moly deposit, both in Mexico’s Sonora state.

“The company has made good progress in addressing throughput issues at Mineral Park, which have, until recently, prevented the company from achieving design capacity of 50,000 tonnes per day,” CIBC analyst Tom Meyer writes in a note.

He cautions that “despite operational improvements over past quarter, the prevailing low metal-price environment has resulted in increasing financial risk.”

Mercator has amended the Mineral Park credit facility that it entered in April 2010 to defer the US$4.8-million principal payment that was due on Sept. 30, 2013, for financial flexibility. The lenders have agreed to not exercise any remedies until Oct. 31, 2013. This date could be extended with the lenders’ approval, the junior says. 

The loan has a US$86.8-million outstanding principal amount, and the changes would give the company the right to withdraw up to US$5 million from its restricted cash in the debt-service reserve account. The polymetallic producer says it has already withdrawn US$3 million for working-capital purposes.

After the initial drawdown, Laurentian Bank Securities analyst Chris Chang estimated the company had US$4.6 million in cash, US$117 million in restricted cash and a US$123.2-million debt at the end of September. “Based on our analysis, we estimate the company would require additional external funding within the next six months,” he says.

The requisite lenders have also agreed to waive other agreements until Oct. 31, so that the company can “pursue strategic alternatives,” Mercator says. Since Dec. 31, 2010, to Sept. 30, 2013, it has repaid US$56.5 million in debt principal, of which US$43.2 million was for the credit facility.

Both analysts have a 30¢ price target on the stock. Meyer has a “sector performer” rating, and notes that the “financial risk remains elevated,” whereas Chang has a “speculative buy,” and says the rating is “based on our implied return, as we see long-term value in Mercator’s assets.” He says the company would have to strengthen its balance sheet before any improvements appear in its share price.

Mercator recently closed at 10.5¢, within a 52-week range of 9.5¢ to 64¢. It has a $33.1-million market capitalization.