Failure of Wolf Minerals Limited

Wolf Minerals Limited and the Drakesland Mine

Wolf Minerals Limited is a specialty metals producer that worked on developing the tin project and Drakesland Mine tungsten on the outskirts of Plymouth, U.K. This company is usually traded as an Australian Securities Exchange (ASX) and Alternative Investment Market company. Wolf Minerals began operating on the Hemerdon project in 2007 which they later renamed to Drakesland mine. The rising global prices of Tungsten prompted the decision to restart Tungsten mining operations at Hemerdon. The company believed that it could increase employment opportunities by 500. It also sought to produce 3 to 4% of the world\u2019s tungsten supply (BBC News, 2015). Unfortunately, the project was never completed successfully, and instead, the company incurred heavy losses.

Reasons for Failure

The main reason as to why Wolf Minerals failed is because it could not produce enough metal. Production in Plymouth started in 2015, but the entire time the company never hit its intended target. The firm planned to recover 65% of tungsten from the pits it dug up, but its recovery rates hovered between 30 to 40%. The closest it ever came was 56%. As a result, global prices dropped, and the company was saddled with huge debts. Interestingly, in the months before the mine was forced to close, the global prices had been rising and recovery levels were improving. However, the company could not negotiate for more funding since it was already dealing with massive debts. Taking on more loans would have meant that they could not have been able to meet vital interests and other payments that were due in October 2018.

Failure to Heed Warning Signs

The company also failed because it did not take note of the warning signs that had been pinpointed by an independent report in early March 2016. In early February 2016, tungsten prices fell by half since the company had started operating on the Drakelands mine. Wolf Minerals, just one month later, reported that over the past six months it had made losses of AU$24,250,452 causing worries regarding the future. The firm also realized a net operating cash outflow of AU$7,542,944, leading to further concerns. PFK Mack, an independent auditor, informed the company that these conditions were alarming and the company might eventually not be able to realize its assets and discharge its liabilities. Wolf minerals ignored these warning signs and insisted that it had enough funds to support the project seeing as it had signed a binding £25million (AU$50,647,500) loan. However, Resource Capital Fund (RCF) offered the company more cash, bringing the total binding loan amount at £70million. RCF became the firm\u2019s major shareholder.

Low Plant Recoveries and Increased Debt

Wolf Minerals also failed due to low plant recoveries which contributed to the company's failure to reach planned production rates. The ore was finer than they had anticipated and the plant experienced numerous mechanical failures. In 2016, the plant made a loss of £37million which pushed it to ask RCF for another loan. The company negotiated a deal for an additional £10 million loan. The firm also needed short-term working capital and, in the end, its existing bridge facility had increased to £40 million. In September 2017, Wolf announced that it had incurred heavier losses than the year before. The losses for that fiscal year were over £43.5 million (Telford, 2017). The situation degraded even more in 2018 when in just six months the losses had accumulated to roughly £19,350,706. Wolf Minerals signed for an emergency loan of £2 million in July. At this point, it owed RCF a whopping £69 million. In early October, the firm announced that it needed to secure a new funding package within forty-eight hours or risk the closure of the Drakelands project. During the summer, Wolf had managed to buy time by negotiating a payment plan with its lenders regarding outstanding fees and payments. It had until October 28, 2018, to pay roughly £2.1 million in interest and other debts. The company was unable to acquire the funds it needed. On October 10, 2018, Wolf Minerals announced that it could no longer be able to meet its short-term working capital requirements and stopped trading immediately. Consequently, more than 200 workers lost their jobs.

Bad Decisions and Missed Opportunities

Wolf Mineral was plagued by one bad decision after another. RFC showed that it had faith in the company by lending it more cash, even though it was making losses. Wolf Minerals was well aware that taking on more loans would have meant that they could not be able to realize its assets and discharge its liabilities (Brigham & Houston, 2018). However, the went on and signed for another loan with RFC. Also, the company focused on digging up the finer ore found on the surface of the opencast pit. This was a bad move because finer ore is usually of lower quality than that found deeper in the pit and also does not produce a lot of tungsten. This partially explains why the company was never able to meet its production capacity. Harnessing the ore heavier and coarser material would have demanded more financial investments, but it would have also generated more money for the company. Therefore, Wolf minerals should have strategized on getting coarser ore from the start. The company would have also been profitable if it had solved its scheduling and technical issues promptly.

Potential for Resuming Operations

There is still hope that mining operations in Drakelands mine can resume. This mine is one of the largest tungsten reserves outside China and thus it is unlikely that everyone would be unwilling to seize this opportunity. Any new owner will need to re-think the entire processing operation to determine a better way to make it work. The operation will demand huge investments, but it can all be worthwhile with the right strategy and management.

References

Brigham, E. F., & Houston, J. F. (2018). Fundamentals of financial management. Australia:

South-Western

Hemerdon tungsten mine: Britain's first metal mine in 40 years opens. (2015, September 17). Retrieved from BBC News: https://www.bbc.com/news/uk-england-devon-34277159

Telford, W. (2017, Sep 29). Plymouth's tungsten mine makes £43.5m loss and borrows more cash. Retrieved from PlymouthLive: https://www.plymouthherald.co.uk/news/business/plymouths-tungsten-mine-makes-435m-55149