Mining and energy companies have recorded several serious successes recently, ranging from Energean (ENOG) flipping its mature oil and gas fields in the Mediterranean for close to $1bn (£790mn) to Hochschild Mining (HOC) building a new gold mine just in time to capitalise on record prices for the precious metal.
But several companies on the brink underline that investors need to be careful in their search for quality. Energy services and construction specialist Petrofac (PFC) is currently working on a major refinancing and restructuring programme, having been overwhelmed by debts coming due and requirements to put up cash ahead of starting major projects. Given its importance in the oil and gas and renewables world, there is certainly a business still to salvage – even if its past corruption issues have kept it in check in recent years.
This type of refinancing is not uncommon. Petra Diamonds (PDL) handed most of its equity to debtholders in 2021, with previous investors left holding just 9 per cent of the company. A weak diamond market and operational difficulties have meant the subsequent rebound has not been spectacular, but it does show there is a future after these deals.
One warning sign for those who have got back in to Petra recently is that the 2026 bonds that were issued in the refinancing have dropped in value, from 80¢ on the dollar in April to 73¢ this month. The company has said it will need to refinance the bonds before hit 'current' status in March 2025, which will provide a test of bond investors’ confidence in the company (for comparison, the value of Petrofac’s bonds has fallen from 80¢ a year ago to 23¢ this month). A Petra investor day on Thursday 27 June, after this article went to press, may provide more clarity.
The lesson from Petra is that even when a restructuring goes right, there can still be reverberations down the line. The diamond miner also had the benefit of only dealing with creditors. Because of the nature of its business, Petrofac also needs to get clients on board.
A spokesperson for the company declined to say whether Petrofac had missed a 16 June deadline for posting a performance guarantee that would secure a major contract. “Failure to do so… would have a detrimental impact on the liquidity of the group and the group’s ability to proceed with the financial restructure,” the company said on 31 May. It is already in default on other payments, and debtholders could launch legal action at any time.
What Petra and Petrofac have in common is being backed by serious assets. One mining hopeful that hit the skids this month, Nevada Copper (CA:NCU), could not get its mine to work even after raising almost $40mn from existing shareholders last year. It restarted the Pumpkin Hollow copper project in late 2023 but ran out of cash after operating challenges limited production.
On the microcap side, former £100mn market cap company Tirupati Graphite (TGR) is trying to raise cash to get its Madagascan mine running at full capacity.
An unwise decision to list on the main market instead of Aim has limited its equity-raising options in recent years, and most of the directors quit earlier this year because of governance issues and poor performance. New chair Michael Lynch-Bell is a serious mining operator, having done the same job for Kaz Minerals, but he faces a challenge in convincing investors the company is worth saving.
Many investors will feel reasonably confident about how to get out of bad situations. In the worst-case scenarios, there's a long way to fall: Petrofac’s share price fell from 74p in June 2023 to 17p by December. Similarly, Tirupati has dropped from 32p to 5p.
But what about getting back in? A large restructuring usually leaves shareholders at the mercy of those that held the debt. We’d suggest looking to an unencumbered rival instead.
