NEW YORK, May 2, 2016 /PRNewswire/ -- MFC Bancorp Ltd.
(NYSE: MFCB) (the "Company" or "MFC") announces its results for the
year ended December 31, 2015 and
provides an update on its recent corporate developments. The
Company's financial statements are prepared in accordance with
International Financial Reporting Standards ("IFRS"). (All
references to dollar amounts are in Canadian dollars unless
otherwise stated.)
In 2015, two significant challenges impacted our financial
results from continuing operations. Firstly, ferro-alloy off-take
contracts with inadequate pricing mechanisms, which have since been
terminated, resulted in realized losses in a declining price
environment. Secondly, the insolvency of one of our finance and
supply chain customers in February
2016 was an adjusting subsequent event which resulted in our
recording credit losses in fiscal 2015.
In addition, declining prices resulted in non-cash impairments
on our iron ore and hydrocarbon properties under our discontinued
operations.
We have taken actions to address these issues and will ensure
that we learn from the lessons of 2015.
Change in Reporting Currency
Since 2007, we presented our financial results in
United States dollars.
However, as we no longer have significant assets or revenues
denominated in United States
dollars, combined with the fact that the majority of our
stakeholders view us as a Canadian company, we have reverted our
presentation currency back to the Canadian dollar. There is
no impact (positive or negative) on our financial position as a
result of this change. Our common shares continue to be
quoted in United States dollars on
the New York Stock Exchange under the symbol "MFCB". All references
to dollar amounts herein are Canadian dollars unless otherwise
stated.
I. WHY ARE WE LATE IN REPORTING OUR 2015 RESULTS
In February 2016, one of our
finance and supply chain customers filed for insolvency. A
customer insolvency is an adjusting subsequent event under
International Accounting Standard 10, Events after the Reporting
Period, and, as a result, we had to determine an allowance for
credit losses against our receivables due from the customer and its
affiliates, the provisions under certain guarantees which we had
made and the potential recoveries as at December 31, 2015. The recognition and
measurement of these provisions was a complex process, involving a
significant degree of judgment and a high level of estimation
uncertainty. This process required management to spend an extended
period of time to evaluate the fact patterns, assess the collateral
and reach conclusions. It is this subsequent event and the
related complex measurement issues that caused our first late
filing ever.
II. CONTINUING OPERATIONS
1. Long-Term Off-Take Agreements
In 2015, we incurred losses in connection with four long-term
ferro-alloy off-take agreements entered into by a subsidiary prior
to its acquisition in 2014. These agreements had pricing mechanisms
and fixed supply quantities that did not adequately address market
volatility.
These agreements contributed a loss of $9.9 million in 2015. We have terminated
these off-take agreements and have instituted additional risk
controls to mitigate our exposure to this type of market volatility
going forward.
For illustrative purposes, the following table sets out price
movements for various ferro-alloys between January 2015 and each of June and December 2015:
PRODUCT
|
June 2015
|
December
2015
|
Ferrosilicon
|
1.1%
|
(24.5)%
|
Ferro
Manganese
|
3.2%
|
(12.5)%
|
Ferro
Chrome
|
(4.2)%
|
(18.9)%
|
Silicon
Metal
|
(1.7)%
|
(28.8)%
|
Ferro
Molybdenum
|
(21.1)%
|
(42.8)%
|
2. Insolvency of a Trade Finance and Supply
Chain Customer
After the end of fiscal 2015, in February
2016, a finance and supply chain customer filed for
insolvency, which is an adjusting subsequent event for our 2015
consolidated financial statements under IFRS. As a result, in the
fourth quarter of 2015, we recorded total credit losses and
provisions of $51.4 million related
to this customer and its affiliates, which includes an allowance
for trade receivables and provisions for potential future
losses.
However, we hold various collateral, including guarantees,
mortgages and other mitigation securities, to recover a significant
portion of these losses. We are exercising our rights as we
undertake various options to maximize our recoveries.
We currently expect that it is highly probable that we will
recover at least $36.8 million of
these losses in 2016. However, under applicable IFRS, our expected
recoveries may only be recognized in our financial statements when
there is "virtual certainty" that they will be collected.
"Virtual certainty" is a very high threshold and
therefore, pursuant to IFRS, we have not recorded our expected
recoveries related to such credit losses in our 2015 consolidated
financial statements.
This creates a timing difference between the recording of credit
losses and the recognition of the associated expected
recoveries. We believe that the most probable outcome of this
timing difference is that in either the second or third quarter of
2016, we will recognize a gain of at least $36.8 million related to these expected
recoveries which will flow through our profit and loss
statement. In our view, this accounting result does not
truly reflect how we view these transactions from a commercial
economic or risk assessment perspective.
III. DISCONTINUED OPERATIONS
2015 was a difficult year, especially in relation to our
interests in the commodity sector. During the year, we decided to
discontinue the following operations:
1. Iron Ore
We are the lessor under a mining lease underlying an iron ore
mine in Canada. The mine had operated since 1966, but in 2015
it was closed by the operator. When the lease is terminated, we
intend to re-take the mine and exercise our contractual rights.
However, these rights have been delayed due to the operator filing
for relief for all of their Canadian mines under the Companies'
Creditors Arrangement Act of Canada.
While we continue to believe that the mine presents an
interesting long-term opportunity, we have emphasized conservatism
and prudence while we focus on our other efforts. As such, we
initiated a rationalization process and have reclassified the mine
and our interest in another iron ore property as discontinued
operations and adjusted the carrying values to $30.0 million resulting in non-cash impairment
losses of $215.6 million (before an
income tax recovery of $46.5 million)
in 2015.
2. Hydrocarbons
We have participated in the energy sector through the
development, production and processing of natural gas and natural
gas liquids in Alberta,
Canada.
We initiated a process to rationalize all of these interests and
reclassified them as discontinued operations. In 2015, we
sold a 95% economic and controlling interest in our Southern Alberta hydrocarbon properties.
The proceeds of this sale consisted of nominal and contingent
consideration, which may provide potential upside should these
markets recover.
The long-term price curves of natural gas, natural gas liquids
and oil declined substantially during 2015 and, as a result, we
incurred non-cash impairment losses of $196.5 million (before a reduction of income tax
assets of $50.9 million) on our
hydrocarbon assets.
Our hydrocarbon interests now include our Northern Alberta production and facilities, as
well as certain undeveloped land and equipment. Our Northern
Alberta assets are on our balance sheet at $50.0 million, net of decommissioning
obligations, which we believe is a prudent and conservative
valuation given the quality of the properties and the potential for
growth and returns once hydrocarbon markets recover.
IV. FINANCIAL POSITION
As at December 31, 2015, our cash
and cash equivalents decreased to $197.5
million from $344.9 million as
at December 31, 2014, primarily as a
result of the repayment of short-term borrowings and debt.
We have decreased our short-term bank borrowings to
$60.1 million as at December 31, 2015, from $187.2 million in the prior year.
Trade receivables and other receivables were $151.2 million and $14.7
million, respectively, as at December
31, 2015, compared to $187.6
million and $26.4 million,
respectively, as at December 31,
2014.
Inventories were $245.3 million as
at December 31, 2015. Inventories
which were contracted at fixed prices or hedged were $141.3 million as at December 31, 2015, of which $13.7 million and $127.6
million of such inventories were initially financed by
suppliers and short-term bank borrowings, respectively.
The following table highlights selected figures on our financial
position as of December 31, 2015 and
December 31, 2014:
FINANCIAL
POSITION
($ in thousands,
except ratios and per share
amounts)
|
December 31,
2015
|
December 31,
2014
|
Cash and cash
equivalents
|
197,519
|
344,891
|
Securities,
current
|
170
|
290
|
Trade
receivables
|
151,229
|
187,558
|
Inventories
|
245,345
|
246,611
|
Total current
assets
|
785,850
|
1,003,259
|
Total current
liabilities
|
414,562
|
440,773
|
Short-term bank
borrowings
|
60,103
|
187,171
|
Working
capital
|
371,288
|
562,486
|
Current
ratio(1)
|
1.90
|
2.28
|
Total
assets
|
977,351
|
1,692,219
|
Total long-term
debt
|
259,038
|
363,255
|
Total long-term
debt-to-equity(1)
|
0.71
|
0.47
|
Total
liabilities
|
608,151
|
913,286
|
Shareholders'
equity
|
367,192
|
777,717
|
Net book value per
share
|
5.81
|
12.32
|
|
Note: (1) The current
ratio is calculated as current assets divided by current
liabilities and the total long-term debt-to-equity ratio is
calculated as total long-term debt divided by shareholders'
equity.
|
Financial Highlights
Revenues for 2015 increased to $1.6
billion from $1.3 billion in
2014, primarily as a result of the consolidation of our
acquisitions in the second quarter of 2014 and an increase in our
finance and supply chain volumes.
In 2015, our net loss attributable to shareholders from
continuing operations was $59.5
million, or $0.94 per
share on a basic and diluted basis. This includes the above
described pre-tax losses of $61.3
million related to an insolvent customer and long-term
off-takes that have been terminated.
Operating EBITDA from continuing operations is defined as
earnings from continuing operations before interest, taxes,
depreciation, depletion, amortization and impairment. Operating
EBITDA from continuing operations is a non-IFRS financial measure
and should not be considered in isolation or as a substitute for
performance measures under IFRS. Management uses Operating EBITDA
from continuing operations as a measure of our operating results
and considers it to be a meaningful supplement to net income as a
performance measure, primarily because we incur depreciation and
depletion from time to time.
The following table provides a reconciliation of Operating
EBITDA to net income from continuing operations for the periods
indicated.
OPERATING EBITDA
(LOSS) ($ in thousands)
|
December 31,
2015
|
December 31,
2014
|
Net (loss) income
(1)
|
(57,918)
|
4,141
|
Tax
expense
|
2,501
|
2,173
|
Finance
costs
|
20,355
|
13,263
|
Depreciation,
depletion and amortization
|
6,450
|
4,957
|
Operating EBITDA (loss)
|
(28,612)
|
24,534
|
|
Note: (1)
Includes net (loss) income from continuing operations attributable
to non-controlling interests.
|
Our operating EBITDA for 2015 included the following pre-tax
losses, which are described above:
OFF-TAKE AND CREDIT
LOSSES ($ in thousands)
|
December 31,
2015
|
Long-term off-take
losses
|
(9,880)
|
Credit losses related
to an insolvent customer
|
(51,382)
|
Total
|
(61,262)
|
We expect that we will recognize a gain of at least
$36.8 million related to the expected
recoveries from these credit losses which will flow through our
profit and loss statement in either the second or third quarter of
2016.
Credit Lines and Facilities with Banks
We established, utilized and maintain various kinds of credit
lines and facilities with banks and insurers. Most of these
facilities are short-term. These facilities are used in our
day-to-day structured solutions and supply chain business. The
amounts drawn under such facilities fluctuate with the kind and
level of transactions being undertaken.
As at December 31, 2015, we had
credit facilities aggregating $900.8
million comprised of: (i) unsecured revolving credit
facilities aggregating $429.6 million
from banks. The banks generally charge an interest rate of
inter-bank rates plus an interest margin; (ii) revolving credit
facilities aggregating $116.2 million
from banks for structured solutions, a special trade financing. The
margin is negotiable when the facility is used; (iii) a specially
structured non-recourse factoring arrangement with a bank for up to
a credit limit of $248.7 million for
our supply chain activities. We may factor our receivable
accounts upon invoicing at the inter-bank rate plus a margin; (iv)
foreign exchange credit facilities of $80.4
million with banks; and (v) secured revolving credit
facilities aggregating $25.7
million.
All of these facilities are either renewable on a yearly basis
or usable until further notice. A substantial portion of our credit
facilities are denominated in Euros and, accordingly, such amounts
may fluctuate when reported in Canadian dollars.
In addition, we have margin lines with availability at multiple
brokers, which enable us to hedge approximately $138.4 million notional value.
V. VISION
Going forward, our vision is to become a regulated trade finance
institution, offering our customers and suppliers a wider range of
structured finance solutions including factoring, inventory,
financing, forfaiting, marketing and other types of risk management
and financing solutions.
There are significant opportunities to offer structured and
trade finance and banking solutions in the markets we serve as many
of our customers and suppliers do not have adequate financing
alternatives and could benefit from our services. Leveraging
our vertically-integrated supply chain platform, we have insights
into financing requirements across the value chain and the ability
to offer a full portfolio of structured and trade finance and
banking products will allow us to meet the needs of our business
partners.
We are making progress towards this goal:
Acquisition of MFC Merchant Bank Ltd.
In the first quarter of 2016, we completed the acquisition of
BAWAG Malta Bank Ltd. (the "Bank") and changed its name to MFC
Merchant Bank Ltd. As part of our group, the Bank will not
engage in retail banking and commercial banking, but instead will
provide merchant banking and specialty banking services, focused on
structured and trade finance, to our customers, suppliers, and
group members, among others. The products that the Bank will
offer include, among others:
- structured and trade finance, including advisory services, in
conjunction with export credit agencies;
- merchant banking products and services, with and without
recourse factoring;
- forfaiting;
- discounting of bills of exchange and promissory notes;
- purchase financing collateralized by the product;
- inventory financing collateralized by inventory and
- bank guarantees, letters of credit, documentary bank
guarantees/stand-by letters of credit, bills of exchange, bills of
lading, promissory notes and forwarders' certificate of receipt
facilities.
The Bank's customer deposits will mainly be comprised of small
and medium sized corporate clients, who may also be trade and
structured finance customers, as well as our subsidiary companies
and other related entities. In addition, we will integrate
our existing long-standing banking relationships with the Bank to
support our corporate vision.
The back office is a significant burden to a bank because it is
a major driver of operating expenditures. However, in order
to maintain a variable cost structure, the Bank will outsource
major back office services as well as internal functions such as
technology, internal audit and payment services to third
parties.
Changes to our Board of Directors
In the last six months, two new directors, Friedrich Hondl and Jochen Duemler joined our board of directors to
support our strategic priorities.
Mr. Hondl is an experienced European banking executive and
former member of the Supervisory Board of Oesterreichische
Kontrollbank AG, the Austrian Export Credit Agency. From 2013
to 2015, Mr. Hondl was the head of Erste Group Bank AG's Large
Corporates International Division, and from 2009 to 2012 he was the
head of International Corporate Relationship Management of
UniCredit Bank Austria AG. He has also served as Chairman of
the Supervisory Board of Intermarket Bank AG since 2014.
Mr. Duemler was the former President and Chief Executive Officer
of Euler Hermes North America, where he supervised a team of more
than 500 people to permanently protect and insure approximately
US$150 billion, managed all credit
insurance and bonding / surety lines, and oversaw all Euler Hermes
operations in the region. From 2002 to 2010, he was a member
of the Board of Management of Euler Hermes Kreditversicherung AG,
and from 1995 to 2002 he was a Member of the Board of Management of
PRISMA Kreditversicherung AG. He is a member of the
German-American Chamber of Commerce (New
York City), a Member of the German Executive Roundtable
(Washington, D.C.), and a board
member of the German American Partnership Program.
We are also announcing that Michael
Smith, our Managing Director, was appointed as Chairman of
our board of directors in March
2016.
VI. COMMENTS
Gerardo Cortina, President and
Chief Executive Officer of the Company, commented: "We have clear
goals and are making changes, but we have to do more.
In 2015, we initiated a process to reduce our inventories and
receivables, but it wasn't enough. We have now started to
implement changes with the goal of drastically reduce our
inventories and receivables so we can reallocate capital to more
profitable business units. This is expected to be
substantially complete by the end of 2016."
Mr. Cortina concluded: "We will maintain prudent and disciplined
policies and practices to provide certainty for our banking
partners, our shareholders, customers and suppliers and we will
continue to work diligently to execute our vision."
Stakeholder Communication
After feedback from our stakeholders, we have decided to change
the format of our quarterly communication following our financial
reporting:
- Stakeholders are encouraged to read our entire audited
financial statements and management's discussion and analysis for
the year ended December 31, 2015 as
set forth in our Annual Report on Form 20-F for the year ended
December 31, 2015 a greater
understanding of our Company's business and operations.
- All stakeholders who have questions regarding the information
in this Annual Report on Form 20-F may call our North American toll
free line: +1 (844) 331 3343 or International callers: +1
(604) 662 8873 to book a conference call with members of our
senior management. Questions may also be emailed to Rene Randall at rrandall@bmgmt.com.
Management welcomes any questions you may have and looks forward
to discussing our operations, results and plans with
stakeholders.
A copy of our Annual Report on Form 20-F has been filed with the
SEC and is available for download under the Company's profile at
www.sec.gov or on the Company's website at www.mfcbancorpltd.com.
Shareholders may receive a hard copy of such report free of charge
upon request.
About MFC
MFC is a finance and supply chain company, which facilitates the
working capital and other requirements of our customers and
suppliers. Our business activities involve customized
structured financial solutions and are supported by captive sources
and products secured by third parties. We do business in
multiple geographies and specialize in a wide range of industrial
products such as metals, minerals, steel products, and
ferro-alloys.
Disclaimer for
Forward‐Looking Information
This news release contains statements which are, or may be
deemed to be, "forward‐looking statements" which are
prospective in nature, including, without limitation, statements
regarding the Company's business plans, anticipated future gains
and recoveries in relation to its insolvent customer, its strategy
to reduce trade receivables and inventories, the integration of the
Bank, future business prospects and any statements regarding
beliefs, expectations or intentions regarding the future.
Forward-looking statements are not based on historical facts,
but rather on current expectations and projections about future
events, and are therefore subject to risks and uncertainties which
could cause actual results to differ materially from the future
results expressed or implied by the forward-looking statements.
Often, but not always, forward-looking statements can be identified
by the use of forward-looking words such as "plans", "expects" or
"does not expect", "is expected", "scheduled", "estimates",
"forecasts", "projects", "intends", "anticipates" or "does
not anticipate", or "believes", or variations of such words and
phrases or statements that certain actions, events or results
"may", "could", "should", "would", "might" or "will" be taken,
occur or be achieved. Such statements are qualified in their
entirety by the inherent risks and uncertainties surrounding future
expectations. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our
actual results, revenues, performance or achievements to be
materially different from any future results, performance or
achievements expressed or implied by the forward-looking
statements. Important factors that could cause our actual results,
revenues, performance or achievements to differ materially from our
expectations include, among other things:(i) periodic fluctuations
in financial results as a result of the nature of our business;
(ii) commodities price volatility; (iii) economic and market
conditions; (iv) competition in our business segments; (v) our
ability to enforce our rights, and recover expected amounts,
related to our insolvent customer through existing
collateral, guarantees, mortgages and other mitigation securities;
(vi) our ability to realize the anticipated benefits of our
acquisitions; (vii) additional risks and uncertainties resulting
from strategic investments, acquisitions or joint ventures; (viii)
counterparty risks related to our trading and finance activities;
(ix) our ability to execute, and the timing and amounts received as
a result of, our plan to rationalize certain hydrocarbon properties
and iron ore interests; (x) operating hazards; and (xi) other
factors beyond our control. Such forward-looking statements
should therefore be construed in light of such factors. Other than
in accordance with its legal or regulatory obligations, the Company
is not under any obligation and the Company expressly disclaims any
intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events
or otherwise. Additional information about these and other
assumptions, risks and uncertainties are set out in our Annual
Report on Form 20-F filed with the U.S. Securities and Exchange
Commission and with the Canadian securities regulators.
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SOURCE MFC Bancorp Ltd.