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Weatherly puts itself up for sale as it drowns in debt – a harsh lesson in proper due diligence (WTI)

Weatherly International (LSE:WTI) tanked by 60pc today following a cluster of disastrous updates, providing a perfect example of why AIM investors must carry out their due diligence before rushing into a stock. The headline news is that the firm has put itself up for sale as part of a strategic review that will also see it look into whether it can restructure its debt, raise capital through equity, or dispose of some of its assets. The sale was launched as part of Weatherly’s ongoing negotiations with long-term debtor Orion, after it announced that it is unlikely to generate enough cash to meet all its rescheduled loan payments.

Alongside the sale, Weatherly also announced that Orion had not allowed it to progress with its purchase of the Kitumba mine in Zambia from ASX-listed Intrepid Mines, as published in December. Intrepid was not able to secure regulatory approvals for the transaction to proceed by the 31 March deadline, and therefore required an extension from Weatherly. However, Orion, which owns 24.6pc of Weatherly and has a right of veto over any material spend the firm wishes to make, has refused to grant this extension.

Although this means the agreement for the acquisition of Kitumba has now lapsed, Weatherly added that Orion has agreed to allow it to seek alternative financing for Kitumba and that discussions are continuing. But with the company putting itself up for sale, this seems highly unlikely to come to anything.  Indeed, even suggesting the acquisition will complete seems like a slap in the face to investors who have seen the value of their holdings in Weatherly fall by 60.8pc as at the time of writing.

Red flags

Weatherly has been attracting a great deal of retail attention over the last year thanks to repeatedly issuing updates with positive headline news. However, the firm has also been repeatedly warning investors about its debt situation; a point largely overlooked until today.

As at the end of December 2017, the firm has a whopping $151m worth of total liabilities against a sub-£10m market cap and a loss of $5.9m for 2017.  This loss isn’t unusual for a company like Weatherly, but it hardly points towards the firm being able to service its debt.

One only has to look at several of the firm’s recent RNS announcements to see this exercise in smoke and mirrors. In February, the firm’s share price shot up by 47.4pc after it announced that it had agreed to purchase an additional 65pc of the high-grade Berg Aukas underground zinc-lead-vanadium project. Great, but flick to the bottom of the RNS, beneath all the administrative stuff, and the firm sneaks in the following: ‘The Company and its subsidiaries are unlikely to generate sufficient surplus cash to meet all loan repayments when due, particularly in the near term.’

Likewise, in another RNS earlier that month, Weatherly shot up 52.9pc after announcing that Intrepid’s shareholders have voted in favour of the firm acquiring Kitumba. But scroll right to the bottom, and we once again see the ghost at the feast: ‘The Company and its subsidiaries are unlikely to generate sufficient surplus cash to meet all loan repayments when due, particularly in the near term.’

Perhaps it is easy to say this in hindsight, but it looks like retail investors ignored the debt warnings in favour of top-line good news.

Dead in the water

Aside from Weatherly’s financial problems, there have also been troubles its operational side. Currently, all of the company’s production comes from its Tschudi open pit copper mine in Namibia, which is producing a steady 17,000 tonnes of copper cathode a year and has recently reduced operating costs.

However, Weatherly’s interim results included red flags for the site, highlighting lower-than-expected leach rates and increased groundwater inflows as the mine got deeper. Today, in a third RNS, the firm said that the costs of dealing with the escalating volumes of water might have a significant impact on the life of mine:

‘At current copper prices, the bulk of the remaining economic value of the Tschudi project is contained within Pit 5 due to relatively high strip ratios and generally lower grades in the pit pushbacks that make up the rest of the current reserve.  Mining and stacking of the current Pit 5 will be largely complete by the middle of calendar year 2020.  A modified design for Pit 5 is being examined which may extend this to the end of 2020. 

As more information is gained on the additional groundwater inflow rates into the expanded pit, it may prove to be the case that the cost of pumping the increasing volumes of groundwater increases to such a degree that much, or possibly even all, of the ore beyond Pit 5 cannot be economically mined and processed at current copper prices.

Additional studies will be conducted to determine how water management costs may be reduced and how inflow rates for mining beyond Pit 5 can be best predicted in order to assess what portion of the balance of the current reserves can be economically mined.  These studies will be completed ahead of any decisions being made.’

These quotes are particularly worrying. Firstly, it means that the life of mine could only last until the end of 2020 if the firm is unable to figure a way of economically mining beyond pit – the life of mine was meant to be 20 years. Secondly, it means that the firm has been cherry picking a small part of the resource – pit 5 – while the majority of the asset remains uneconomical. Thirdly, at the end of the life of mine, the firm will have to pay a remediation cost that can be in the tens of millions. Firms usually capitalise this cost and don’t put it on their balance sheet, instead preferring to expense it once you know you need to start closure. The fact that this could now have to be paid within two years hardly helps Weatherly’s already dire financial situation.

Buyer beware

This piece is a summary of some of the red flags that were flying over Weatherly before today’s announcement. Unfortunately, it goes to show is that the market can often get carried away by headline good news and this psychology makes it resistant to the truth. Even the fact that chief executive officer Craig Thomas resigned earlier this month didn’t appear to ring alarm bells for some. Careful analysis of every line in RNSs can help avoid getting caught up in dog investments like Weatherly. It also often pays to start reading announcements back to front. Directors often try to sneak out the really nasty news at the end.

Authors: Daniel Flynn & Stuart Langelaan

Disclosure: The authors of this piece do not own shares in any of the companies mentioned

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