Mercator Minerals (TSX: ML; US-OTC: MLKKF) will likely be in more financial trouble than ever, if the proposed business combination with Russia’s Intergeo falls through.
The chances for failure are high: the Russian Federation Anti-monopoly Services (FAS) on July 2 requested another two months to review the proposed acquisition of Mercator by Intergeo, and Intergeo — controlled by Russian billionaire Mikhail Prokhorov’s Onexim Group — is unwilling to extend the completion deadline of the deal beyond Aug. 1.
In a July 15 release, Mercator noted Intergeo would end the deal, signed on Dec. 12, 2013, if the federal regulatory body does not wrap up its review by August.
This news sent analysts scrambling to cut their price targets while the Vancouver-based junior sought other ways to manage its debt, which Intergeo would have taken care of if the deal closed.
“In our view, we believe it is unlikely that the company secures approval from the FAS prior to Aug. 1, 2014,” Laurentian Bank Securities analyst Christopher Chang said in a note. Chang has a “hold” recommendation, but has halved his target to 5¢ due to the company’s weak balance sheet.
At the end of the first quarter, the copper-focused junior had US$8.2 million in cash and US$140 million in total debt. US$113 million of that debt — including a US$79-million credit facility — is due in the next year, Chang notes.
The company says Intergeo will waive the non-solicitation terms in its agreement — which means Mercator can fully consider its alternatives over the coming weeks.
The junior has been talking to its syndicate of lenders on revising its debt agreements, Chang says. “Given that the company was already in payment default as early as Sept. 30, 2013, we believe Mercator’s ability to remain a going concern could be in serious question.”
CIBC analyst Tom Meyer says it is “very disappointing” that Intergeo will not extend its deadline.
Under that proposition, Intergeo, controlled by Onexim Group’s Daselina Investments, would have held 85% of the merged firm, with Mercator shareholders holding the rest.
Daselina would have invested a total of US$100 million, including the US$14 million it has already advanced under a bridge loan to Mercator, in the combined firm via a private placement. Roughly US$50 million of the proceeds, including the bridge loan, would have gone towards paying Mercator’s outstanding loan.
If the deal collapses, Mercator will be required to repay Daselina’s bridge loan, which it used to improve its underperforming Mineral Park copper-molybdenum mine in Arizona.
“With higher copper and moly prices, we see ML in a better operating position than it was last year, but financial risks are high,” Meyer notes.
He has reiterated a “sector underperformer” rating and has lowered his 12- to 18-month target to 3¢ from 10¢ per share.
On the potential deal termination, Mercator, which also has two development projects in Mexico, saw its shares drop from 8¢ on July 14 to close July 17 at 5¢.
The junior has 315.6 million shares outstanding for a $15.8-million market capitalization.