Dominion Diamonds, one of the world’s largest rough diamond producers, and most important employers in the Northwest Territories, is in serious trouble.
One of its two mines, Ekati, is shuttered. It has about $180-million US worth of inventory it can’t sell since its Belgian retailers are closed. It’s $550 million US in debt and doesn’t have enough cash to pay a $20-million US bill due May 1.
Kristal Kaye, the company’s chief financial officer laid out the situation in court documents this week as the company sought creditor protection from the courts.
Now that the court-ordered protection is in place, the company has time to restructure under the supervision of a financial monitor and avoid bankruptcy. It’s on life support — and experts say the length of the COVID-19 pandemic may determine whether it survives.
What is CCAA protection?
The Companies’ Creditors Arrangement Act (CCAA) is a federal law that allows companies that owe creditors time to restructure when they can’t pay, supervised by the courts, explained Ian Lee, a business professor at Carleton University. He’s also a former banker who’s worked with this legislation before.
It makes sure creditors — banks, governments, workers — get at least some of the money they’re owed and allows companies to survive and avoid bankruptcy in an orderly and objective way, guided by a third-party trustee, he said.
Still, he said creditor protection is a serious sign the business is not successful.
“No company’s CEO says ‘hire me and I’m going to take this company into bankruptcy,” Lee said. “It is a last resort, when all other strategic options have failed.”
The purpose of the act [CCAA] is to ensure that the company, even a much smaller company can be salvaged out of the wreckage– Ian Lee, Carleton University
One of the positives for companies is that the court can order some debts wiped off the books, leaving them with room to emerge from the protection in a better position.
“It’s better to have half a loaf, then no loaf at all,” Lee said. “It’s better to have a smaller company survive out of the carcass of the previous insolvent company than it is to liquidate the entire company.”
An economic victim of COVID-19
In the case of Dominion Diamond, the company’s stuck with a product it can’t sell, the looming $20-million interest payment due May 1 it can’t pay, and no idea when business will return, according to court documents.
“The purpose of the act is to ensure that the company, even a much smaller company can be salvaged out of the wreckage,” Lee said.
He examined the company’s court filings and isn’t surprised it’s had to take this course of action. It comes from the harsh economic math brought on by COVID-19’s health restrictions.
“This company was a viable company before, but right now, because of the [COVID-19] crisis, markets have stopped functioning,” he said.
Will Dominion survive restructuring?
Lee predicts some of the company’s $500-million debt will be written off by the courts but its future success hinges on whether the diamond market rebounds — which is likely, but isn’t guaranteed.
Paul Zimnisky, a diamond-industry analyst and a frequent commentor on Dominion Diamond likewise sees hope in this situation. He trusts the company is being truthful in its commitment to reopen Ekati as COVID-19 subsides.
“It’s not just Dominion, it’s not just the diamond industry,” Zimnisky said. “If they can’t sell diamonds, they can’t move product.”
The move to creditor protection protects them against a missed interest payment, which could trigger a disruptive bankruptcy. He notes the company is owned by the Washington Companies, a U.S-based conglomerate which has proposed an influx of cash to keep it operating.
Though this uncertainty is challenging for the industry, Zimnisky said he too is optimistic about Dominion’s ability to survive.
‘Wake-up call’ for the N.W.T.
Dave Ramsay, a Yellowknife-based business consultant and former N.W.T. industry minister calls this development a “wake-up call” to show how fragile the territory’s diamond industry is.
“Will it look the same? Probably not,” he said. “That’ll all play itself out as we go through the next few months.”
Ramsay is also on the board of Fortune Minerals, a mining company developing a project near Whati, N.W.T. In the past month, he’s seen investors dry up as the company’s stock price tumbled.
He’s hopeful Dominion will get through the restructuring and reopen Ekati, but acknowledges it will be difficult. He’s calling for more government support for the territory’s other mining companies.
“We have to take a good, hard look at what mining means to the Northwest Territories and how it puts people to work,” he said. “It took something like this to wake us up.”
For people living in the Northwest Territories, that may be the worst part of this situation.
Wake-up call or not, there’s nothing anyone can do but wait as it plays out in court.