FEC Weekly commentary - Walkabout calls in the Administrator

The following is from Fareast Capital - Weekly commentary, which mentions WKT.
There are a few good points that investors should take into account for their future investments.

http://www.fareastcapital.com.au/newsletter.asp?id=642

Walkabout calls in the Administrator
You are probably tired of me expressing caution about graphite stocks, but we have just been given a timely reminder as to why I do so. Walkabout Resources (WKT) has called in the Administrators. I wrote a brief note a year ago on 26/12/23, noting the event of the commissioning of Walkabout’s Lindi graphite mine in Tanzania. I expressed hope for them but that wish was not enough.

Investors should note that companies are rarely completely honest when it comes to reporting progress of mines that are being commissioned. Rather, they try and emphasise how good things are going and then bingo! The sword falls. Maybe they are not being dishonest, but that is different to being completely honest.

You might think that examination of quarterly 5B cash reports will give some early insight, but no, these are rarely very helpful at the best of times because of their procedural nature. There is never any truth testing. Though, in the case of Walkabout, it did report a tiny cash balance of $136,000 at the end of September.

The quarterly operations report said that US$2m of senior debt was drawn during the quarter, and credit-approved working capital facilities were received from two banks. Readers could have felt comfortable that the Company was adequately funded as production had reached 50% of nameplate capacity, and was rising. Demand for its products was reported to be “strong”. The Company said that cash costs were significantly less than guidance but there was some sort of hold up in the selling side of the operation with stockpiles building up at the port.

Commissioning was work in progress

The description of operations for the quarter all sounded fair and reasonable but with the caveat that plant availability was lower than planned due to fugitive graphite dust causing regular shorting of electrical components. A six day shutdown for modifications saw an improve to 80% of targeted daily production, but further improvements were needed to achieve target product purity. There was still an issue with excessive fines and ultra fines.

Investors should always remember another caveat I frequently express. That is, try and avoid commissioning risk. If something goes wrong with the orebody, the plant, the product quality or the sales, it can be terminal. Gold is probably one of the easiest commodities to take through commissions, but graphite would be one of the more difficult. After 11 months since the start of commissioning, Walkabout still hadn’t managed to achieve optimised performance on a number of fronts.

But things started to quickly go bad

The quarterly report provided information regarding performance up until 30 September but the quarterly wasn’t released until 31 October, three days after the announcement that the funder, Gemcorp, had provided a short term bridging loan to alleviate the problems with the shortfall in cash flow coming from the port congestion. That sounded ominous, but Gemcorp seemed to be supportive. However, only 16 days later, Gemcorp placed Walkabout into Administration. The Receivers and Managers then obtained a $10m funding facility which is intended to allow the company to continue to trade.

What now for shareholders?The first point is that the shares are now suspended from trading, meaning shareholders have no liquidity of their investment. No-one can say how long they will remain suspended. Secondly, the company is now being run with the overriding objective of preserving the value of the loans provided by Gemcorp. Preservation of shareholder value comes at a distant second priority.
The Bottom Line

The interim failure of Walkabout should be putting the wind up all of the other graphite hopefuls. It is time for shareholders in these companies to think long and hard about whether there is something overwhelmingly special about their companies, or whether they are just holding shares in another industrial mineral company that is doomed to failure. It would be a mistake to just swallow the rhetoric that company directors preach. There is nothing easy about graphite.

Two points are worth making. Firstly, when a company steps over the line to develop a mine there is no knowing what is going to happen. Don’t assume that the studies released to the ASX are first rate, because often they are not. Disaster can and often does happen - and they say exploration is risky!

Another point is that you cannot rely on company announcements during a commissioning period. They never give you the true colour as they are almost obliged to be positive.