Milk formula exporter Mataura Valley Milk has breached its banking covenants and said it will require a financial lifeline by December to keep its head above water - making it a likely investment target to help A2 Milk scale up its manufacturing capacity.
The Southland processor plunged to a $47.1 million loss on the back of high start-up and loan-servicing costs in calendar 2019. It said it will face a funding shortfall of $26m in 2020, with an additional funding line now necessary to keep its plant running past December.
Mataura is known to have a relationship with A2 Milk already. In April, chief executive Bernard May told BusinessDesk that the $300m Gore plant will transition to processing A2 nutritional milk over the coming two seasons.
Of the 180 million litres of milk processed during its first full season, its 29 farmer suppliers delivered about 100 million litres, with the remainder brought in from other South Island sources.
Mum's the word
A2 Milk has been tightlipped in response to earlier speculation it's keen on Mataura. In a statement to the NZX last month, A2 Milk said only that it has had discussions with a "number of parties in relation to potential strategic options relating to participation in manufacturing capacity and capability."
But Mataura wants and needs an investor with deep pockets. Its $114.5m in revenues for 2019 were eroded by finance expenses and high payments to farmer suppliers. Set at 20 cents a kilogram of milk solids above Fonterra's price, the South45Milk programme is the highest price on the South Island.
In its financial statements filed Tuesday, the firm also confirmed it was in breach of covenants with both the China Development Bank, over a loan of US$52.6m ($80.1m), and China Construction Bank over loans of US$116.6m.
And neither bank has waived their right to call those loans. Accordingly, those loans have been treated as current, resulting in total current loans and borrowings climbing from $3.7m to $239.7m. The firm will be jittery knowing that CCB also holds security over the company's Gore properties.
The implications of Covid on the kiwi/US dollar exchange rate hasn't helped, with Mataura impacted by what was an effective 16.7 per cent correction since balance date. This saw the NZ dollar value of the US dollar liability to China Development Bank increase by $15.7m.
Majority shareholder China Animal Husbandry Group, which holds 82.15 per cent of the processor, has provided a guarantee to the two banks, for which it charged the firm a hefty $1.2m in interests and fees, now capitalised at more than $2.9m to date. The China Development Bank guarantee is dependent on the China Animal Husbandry shareholding remaining above 60 per cent.
Seeks strategic partner
May confirmed the firm has "made progress" in its search for a strategic shareholder, targeting potential investors with the capacity to inject $100m-to-$150m, "and also to accelerate the company's nutritional strategy through supply agreements for nutritional product."
To help out, last year it brought in investment advisers Macquarie Capital and DG Advisory - who have billed more than $500,000 to date.
May said the season had also presented operational challenges, but that "supply chains were still open" and the company had been able to sell whole and skim milk products at prices above Global Dairy Trade levels.
Since the December 31 balance date, the company confirmed it had entered working capital agreements in March with China Development Bank and with Rabobank Hong Kong for a combined US$49.5m of working capital funding. It also settled its $57m working capital loan with HSBC.