Alliance Mineral Assets (ASX: A40) has entered voluntary administration after being unable to meet its monthly cash burn. The business was struggling with cash burn and was a high cost lithium producer in production phase. This is an important lesson for investors about high cost producers, particularly those in industries with very volatile underlying commodity prices. While Lithium has been around for a long time, the sudden increase in demand from producers of electric car batteries put the commodity price in unchartered territory, making it hard to discern what the cycle would look like.
Alliance Mineral Assets has recently entered voluntary administration (Credit: Alliance Mineral Assets)
When the cycle surprised on the downside, as many cycles often do, several companies found themselves in positions where they were making losses. A40 was one of them, but the problem is that mines cannot just be shut down overnight, since there is a cost in keeping them operational. Against a hefty share price decline, the company struggled to raise capital to fund its operations and ended up being in a position where it was unable to meet its liabilities.
Korda Mentha has been appointed as the administrator and will complete the process of winding up the company’s assets. While past financial statements reveal that the company has much more in assets than liabilities, financial statements are prepared as though the company’s operations will continue (these companies are known as “going concerns). When a company is not a going concern, it’s asset values could be very different, and this is particularly true of intellectual property. Plant, property and equipment is the largest asset of the business and could decline in value markedly if no one wants to buy the lithium mine, since the selling price may be very different to the cost of the mine. This is because it will be difficult to find a buyer, since the profitability of the mine has turned and was what made the company bankrupt in the first place.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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