There's always get out clauses in any mining contractor's contract. No contractor is ever safe. It all comes down to how much it costs to terminate. It's highly unlikely WPG will walk way with nothing to pay, that very rarely happens, regardless of under-performance. I tend to think they will meet in the middle circa $4.5m, but I'm not a lawyer and we don't know the full details so time will tell.
Mining companies never break contract without wearing some cost, management will be fully aware of that. At bare minimum, WPG will likely be hit with demobilisation costs. Look into interstate heavy haulage transport costs, if you want to get an idea of how much a demobe can add to, and then add in some more for good measure. Obviously WPG believe whatever the termination costs amount to will be less damaging to the business than keeping them at challenger under-performing over the long term. Fair enough, they're clearly brave enough to wear the short term pain that comes with it for the greater good of the business, but safe to say they were expecting their cash position to be a little higher to support the move they've made, so I'm sure that will be cause of some concern.
When I first heard there was issues at Challenger, the contractor were allegedly on their second strike and being written their 3rd. How much truth in that is debatable, but given what has transpired I'd say it's not far from it. For those not involved in the industry, a little bit of research into the contractor would have revealed what they had inherited with their investment in WPG - this is not the first time this has happened and it won't be the last. The contractor play hard ball with juniors, why? because they can.
This is also a concern:
"During the year, CGO entered into an agreement with Diversified Minerals Pty Ltd whereby DMPL procured a bank guarantee to be issued to replace the $2.6 million cash backed bond and these release funds were utilised as working capital at the Challenger gold mine. DMPL was granted security over the shares held in CGO and the assets of CGO.
Subsequent to year end this security granted to DMPL was discharged. In lieu of posting a replacement rehabilitation bond in respect of the Challenger gold mine, the Company has granted security over the assets of WPG Resources Ltd, Challenger Gold Operations Pty Ltd, Tarcoola Gold Pty Ltd and WPG Gawler Pty Ltd to the Minister for Mineral Resources and Energy in South Australia. The security will be released when a replacement rehabilitation bond is provided by the Company."
Another $2.6m they need to find.
Questions should be asked as to how the contractor were able to 'bank' the easy money both in under-performance and through the JV - the wolf has already won in this case, regardless of the outcome, and management were the sheep right from the beginning imo.
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