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Will the fat lady soon be singing for Mowana - Cradle Arc looks screwed!

By Gary Newman | Thursday 8 November 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

On the face of it I can see why some investors have been drawn to Cradle Arc (CRA), as it is actually producing copper and has a market cap of just £2.5 million, but there could well be good reason for its shares appearing to be cheap.

The share price has collapsed since it listed at the start of the year and hit highs of nearly 12p, and it now looks to be in potentially serious financial trouble, especially if we don’t see a significant rise in the copper price in the very short term.

Its main focus is the Mowana copper mine in Botswana, which is controlled by its 60% owned subsidiary Leboam Holdings, and with measured and indicated resources of 640,000 tonnes of copper and a mine life of eleven years, plus a feasibility study that was carried out when copper was around the $2.6/lb level, you’d expect that the company should be doing well now that production has actually commenced.

Unfortunately though, that feasibility study was based on annual production of 12,000 tonnes per annum – with the potential for expansion to 22,000t – and the most recent operational update showed that total production for Q3 was just 712 tonnes.

The lack of output can be largely blamed on the processing plant, which is over ten years old, and has caused serious interruptions to the operation.

The situation is that serious, that although it is expecting improved output for the rest of this year and 2019, it is unwilling to give any guidance as to what that might be – although that is preferable to giving optimistic figures and then failing to meet them. Originally 4,000t was forecast for H2 2018, and even the 1,000t target for Q3 was missed!

Is if all of that wasn’t bad enough, the copper that the company is producing is costing more than it gets from the sale of it at current copper prices, so operationally it is loss making and cash flow negative.

Financially the company looks like it could be in serious trouble and is already drowning in debt – it currently has $10 million of secured non-convertible loan notes which are due to be redeemed on April 3 2019, and these are secured against the entire share capital of Leboam. Interest on those notes is payable at an eye-watering 18% per annum and it is hard to see how the company will even manage to pay the interest, let alone the principal.

That isn’t the only loan secured against Leboam, as there is also $21 million from ZCI which enabled the purchase of Mowana, and this is repayable out of any free cash flows from the project.

ZCI also have a $10 million secured loan which commands interest of 13.5% and becomes repayable in 28 monthly instalments from January 2019 onwards. A similar loan is also repayable to the liquidators of Messina Copper, for the same amount and interest rate, but payable over 18 months from the start of next year.

The company can at least convert some of its debt into equity, with circa £1.18 million of loan notes which are due to be repaid at the end of this year, although that is just a drop in the ocean compared to the rest of its debt.

One slight glimmer of hope has been a £2 million loan from its largest shareholder, PenMin, which holds nearly 38% of Cradle Arc. This is also secured against the Leboam assets, but ranks behind the existing secured loans.

But the rate at which it burns through cash means that this money will be gone in the blink of an eye, and it will need to secure further funding in the immediate future.

Given the size of its debts and its tiny market cap, it is hard to see how it is going to be able to restructure its balance sheet in a way that would avoid defaulting on loans repayments as they become due. Even if the lenders are understanding, I would still expect the loans to be renegotiated in a way that isn’t good for the company. 

It is hard to see how this is ever actually going to make a profit, assuming that it even survives, which seems unlikely at the moment.

I think you would have to be crazy to invest at this stage, at a share price of 0.9p, given the risks, and can only see any actual investment case once much higher future production is confirmed, and repayment of its debts becomes possible, and even if a miracle occurred and that happens, it could be years before it generates any sort of net profit. 



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