Analysts flag Cardero’s low cash flow

Cardero Resource’s (TSX: CDU; NYSE-Arca: CDY) largest shareholder, Luxor Capital Group, is offering to restructure its existing loan and even take over the company to dissuade Cardero from completing a debt financing with new lenders controlled by one of its private shareholders. But analysts predict it’s unlikely that Cardero will approve Luxor’s acquisition, noting the debt scenarios do little to improve the junior’s dwindling cash position. 

On Aug. 5, Cardero said it would raise US$5.7 million in a private placement of senior secured notes with equities controlled by Robert Kopple, a California-based lawyer and a private Cardero investor, to repay the $5.7 million debt it owed Luxor and its affiliates.

In April Cardero raised net proceeds of $5.1 million in a private placement of senior secured notes with Luxor, a New York-based investment manager, largely to fund the acquisition of a private company holding certain coal licenses at its flagship Carbon Creek metallurgical coal project in B.C. Along with those notes, which carry a one-year term and a 10% interest rate, Cardero gave Luxor 2 million shares as a bonus for purchasing the notes. 

But in late July, Luxor demanded to be reimbursed by early August, alleging Cardero failed to pay roughly US$48,000 in legal fees related to the deal. The Vancouver-based junior disputed the claim and recently found new lenders led by Kopple, who is expected to join the company’s board shortly. 

Initially repayment of the new loan was slated to be made in two tranches, with the first US$3.7 million due by Dec. 31, 2013, and the second in two years, both at a 10% annual interest rate. While the interest rate is comparable with the Luxor notes, the downside of the debt, as analysts noted earlier, was the attached warrants that made it potentially more dilutive. 

Cardero had originally planned to issue 83.8 million warrants to the lenders exercisable at 7¢ over a seven year term. If fully exercised, the lenders would hold a 43.7% stake in the junior. 

This  took Luxor by surprise. The group, which controls roughly 11% of Cardero, released a statement in which it said it had sent a letter to the junior’s board on Aug. 6 denouncing the Kopple notes as “a literal death sentence” for Cardero’s shareholders. 

“We are surprised that you took the extraordinary measure of issuing 43% of the company in warrants . . . for a note that matures in large part in less than five months,” the letter states. “As the largest current shareholder of Cardero, the Kopple notes will ensure that the only people who make money in Cardero going forward are Mr. Kopple and the insiders of Cardero.”    

In a push to have the Vancouver-Cardero drop the financing, Luxor offered to waive any existing defaults under the Luxor notes and provide better terms than the Kopple notes in exchange for warrants representing 30% of Cardero’s shares, exercisable at US10¢ apiece. Alternatively, the New York-based group proposed to take over the junior for 13¢ in cash for each share it didn’t already own, representing an 85% premium to Cardero’s closing price on Aug. 5. 

Cardero shares have lost roughly 79% this year and have been trading within a 52-week range of 5¢ (July 30, 2013) and 90¢ (Aug. 23, 2012). The company also received a deficiency letter from the NYSE-MKT in July for falling short of certain listing standards, likely because of its falling share price and difficult financial situation. 

But on Aug. 8 Cardero said it did not receive a letter from Luxor but was made aware of Luxor’s proposals, adding its board would consider all avenues. 

A day later, the junior completed the US$5.7-million private placement with Kopple with a few adjustments, which included repaying the second tranche of US$2 million by Aug. 8, 2014, compared to two years before, and more importantly reducing the number of attached warrants from 83.8 million to 28.4 million to represent 21.7% of the company if fully exercised. Moreover, the strike price was hiked up to 9.5¢ from 7¢ previously. Cardero says it intends to seek shareholder and regulatory approval to allow the full exercise of the warrants.

Cardero adds it’s in advanced talks with Kopple regarding a line of credit to secure additional funding, noting it’s exploring all the available options for Carbon Creek including strategic partners. 

“The arrangement with Mr. Kopple buys Cardero some time and the line of credit, if it is finalized, could help with some of the most immediate liquidity needs,” Salman Partners analyst Mike Plaster writes. He estimates Cardero could continue to sustain its operations for another month or so before running out of cash. (The company had a cash balance of $2.9 million at the end of April.) 

While securing the debt to repay Luxor “was a necessary step by Cardero to avoid potentially losing control of its key asset,” Plaster cautions that the company’s financing risk remains, with the first US$3.7 million repayment for the Kopple notes due by year-end. 

Desjardins analyst Jackie Przybylowski echoes Plaster’s concern, pointing to the company’s low cash position. In a recent research note Przybylowski predicts Cardero would need to raise another $5 million over the next 12 months to cover corporate overhead and pay the first tranche of the Kopple notes, adding it would need additional funds to develop Carbon Creek. 

Plaster estimates the junior would require a further $8 million to resume the feasibility study at Carbon Creek, which was suspended in June, plus another $10 million to cover pre-construction costs at the deposit. He maintains a “sell” rating  on the stock and is reviewing his target price. Przybylowski has a “sell-speculative” rating on Cardero and a 5¢ target.


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