Debt Restructuring Provides
Financial Flexibility
Reason for Comment:
Company Update
Event:
Restructuring of Debt Agreement
Analysis & Forecasts:
ECU Silver entered into an agreement
with its lender to restructure its current debt by deferring
principal payments for a year. ECU currently has $15.75
million drawn against its $22 million facility, and will now
have until November 30, 2010, to commence principal
repayments in equal monthly instalments over a period of
12 months. The cost of this arrangement to ECU is an
increase on the coupon to 12% (from 11%). While operations
at the Velardeña oxide mill are now generating cash flow,
the one-year deferral of the debt repayment provides the
company financial flexibility (ECU reported Q2/09 cash and
cash equivalents of $385,000).
Valuation & Recommendation:
This release is positive for
ECU, allowing the company to match cash flows of liabilities
with the ramp-up at Velardeña. Despite the mitigation of
near-term financial risk, ECU still has a weaker-thanpreferred
balance sheet. We are maintaining our NAV at
$0.75 per share (includes $0.30 for the oxides and $0.45
for the sulphide resource) and holding our target price
(based on 1.0x NAV) at C$0.90. We are maintaining our
OUTPERFORM recommendation, but caution this company
is for risk tolerant investors only.
Primary Reasons for Recommendation:
1. Attractive valuation (0.68x NAV and $0.54/oz in-situ)
but balance sheet is weak.
2. Excellent exploration upside at Velardeña.
