Last week saw Cradle Arc (LSE:CRA) place its 60pc-owned subsidiary Leboam Holdings into provisional liquidation. Leboam owns Cradle Arc’s flagship asset, the producing Mowana copper mine in Botswana. The move occurred less than 12 months since Cradle Arc listed on the London market, raising questions whether this business was ever fit for a public listing.
Cradle Arc entered AIM at the end of January. It raised £5.65m to support the ramp-up of production at Mowana, which it claims to have a base case NPV of $87m. It said the mine has significant upside potential from the development of nearby exploration areas.
In the months that followed its listing, the company issued numerous positive updates. Often, these focused on the installation of a dense media separation unit at Mowana to increase it processing rate.
However, things took a darker turn in Q3 2018. First-of-all, intermittent breakdowns and interruptions at Mowana prevented the mine from meeting its production guidelines. Then, in October, Cradle Arc announced that it had set up a $2m loan facility. It needed the money to establish an inventory of spare parts and improve and rehabilitate Mowana’s processing facilities.
Fast forward to this month and Cradle Arc said a debtor called Fujax had refused it access to an agreed $4m working capital facility. It further demanded that Leboam alters the terms of its interest over Mowana. However, Cradle Arc said negotiations were not progressing in a positive direction.
Due to a lack of cash, the business suspended mining operations at Mowana until further notice. It also suspending trading in its shares.
Following this, on Tuesday, Cradle Arc announced that Leboam had been placed into provisional liquidation as talks on alternative funding arrangements continued. This followed its failure to settle its disagreement with Fujax. Meanwhile, Fujax and ZCI, a 40pc shareholder in Leboam, made a separate application to place the business under judicial management.
Then, on Thursday, Cradle Arc announced that the court had issued a provisional judicial management order for Leboam. Chartered accountant John Hinchcliffe will be the firm’s provisional judicial manager. He must work to secure and preserve assets and prevent mismanagement.
Leboam now has until 21 February 2019 to submit a business plan. The court will then decide if it can be discharged from provisional judicial management.
Cradle Arc’s rhetoric around whether it will be able to meet this demand is mixed. The firm said it had begun discussions with various existing and potential funders to try and secure Leboam’s future. However, it adds: ‘There can be no guarantee that the Company will be able to secure the necessary financing in order to support a credible business plan to the Botswana High Court by 21 February 2019.’
Likewise, the firm said it is confident it can raise the money needed to cover corporate overheads and general administration costs. However, it added that if it cannot get this then insolvency is ‘highly likely’. The business also said HMRC is carrying out an ongoing inquiry into its VAT registration.
Kevin van Wouw, CEO of Cradle Arc, finished off by saying: ‘The Company will co-operate with the Provisional Judicial Manager in order to seek the best financing and operational plan for Leboam, to resolve the group’s current financial difficulties.
‘Following from the impasse between Fujax and the Secured Lenders to the project, where the working capital facility agreed was not completed and which has directly led to this situation, we have commenced discussions with various existing and potential funders in order to attempt to secure a suitable financing solution for the project going forward.’
What a disaster this company has been and, unfortunately, the warning signs were there from the beginning.
Hindsight is a wonderful thing in the investing world, but looking back at Cradle Arc, there were some points about the company we should have picked up on in our original coverage. The first red flag was the length of the admission document. It was 475 pages. The sheer weight of this document was an indicator that this company was higher risk (to put it kindly). At the very least the investment rationale was overly complex.
Investors didn’t need to dive too deep into the document to discover some unpleasant facts about the business. Things all started to unravel on page 22.
Here we first learned about Cradle Arc’s corporate structure. With a total of 14 subsidiaries, this was far too complicated for a business worth c.£20m at listing.
A bit further down, on the same page, and things got worse. We went on to learn that Leboam took on a $9.9m secured loan with ZCI, its 40pc shareholder. This is repayable in monthly instalments over 33 months with a 13.5pc interest rate a year. It also sits alongside another, longer-term $21m loan.
So from day 1, Cradle Arc was burdened with $31m of debt. This left no room for anything to go wrong. Which it did.
Although the smaller loan had a nine-month moratorium attached on capital repayments, this expired at the end of October. With operations at Mowana already heading south by that point, the firm appears to have struggled to meet these obligations.
There is a clear lesson here for equity investors. If a firm has too much debt that it may not be able to service, then your money is at risk of a complete wipeout. Before making any investment it always pays to understand a company’s balance sheet first and that way avoid car crashes like Cradle Arc.