Management collapsed BCL – Liquidator

SHARE   |   Monday, 30 October 2017   |   By Ditiro Motlhabane
Management collapsed BCL – Liquidator

Creditors of the defunct BCL mine will be shocked at the empty shell they poured millions of Pula into coupled with confusion and uncertainty over the value of its assets when they convene for their first meeting at Travel Lodge in Gaborone on November 6, 2017. Those wishing to attend the first meeting of creditors must have submitted signed claim forms and documents in support thereof by the end of the week (Friday, 3 November 2017). But there is a catch! Creditors were caught in a dilemma this week, grappling with the question of whether or not to submit claims or wait out the liquidation process because of a legal requirement which makes them financially liable for the administration of the insolvent estate. Should creditors prove a claim, they will be liable for a contribution which could amount to millions of Pula when the process is complete many years later. Already the provisional liquidator of BCL mine in Selebi-Phikwe, Nigel Dixon-Warren – a senior partner at audit giants KPMG – says it will take years to wind up the BCL estate. Such revelation is contained in a report dated October 05, 2017 which accompanies an invitation to the first creditors meeting in two weeks.

Management incompetence

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The report makes damning conclusions against executive management of the mines led by CEO Daniel Mahupela. A request was made by the Provisional Liquidator to management to put together a care and maintenance team for the period from 1 November 2016. The plan put together by management was not considered suitable, practical or realistic and despite a number of attempts to try to have them modify the plan it soon became apparent that management did not have the capability or skill to do so. Senior management was also requested to provide a handover to the liquidator and while some written notes were provided these were often written by more junior members of staff and were inadequate for the purpose. Two events are illustrative of the lack of competence within management team. Firstly, at BCL, while the smelter was not needed for operations there was debate as to what needed to be done in C&M. Management recommended keeping it at “holding temperature”, a temperature significantly lower than operating temperature that could be maintained using diesel. The cost of which would be significantly lower than keeping the smelter as operating temperatures but nonetheless considerable estimated to be P15 million per month. Having consulted a pyrometallurgical specialist as well as the original equipment manufacturer, the liquidator was advised that smelters of the type at BCL cannot be held at “holding temperature” and that in fact keeping the smelter fuelled on diesel was likely to do more damage than shutting it down. Both recommended that unless it was envisaged that the smelter would be operational within six to twelve months, the costs of maintaining the smelter at operating temperatures would exceed potential costs of restarting it from cold. Given the state of the mining operations, it was considered unlikely that the smelter would be utilised for a period of at least 12 – 18 months. The decision was taken, therefore, to shut it down. Management’s advice was wrong and would have prejudiced creditors, concludes the liquidator.

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Secondly, at Tati, following the advice that operations were to cease on 7 October 2016 no efforts were made to safely shutdown equipment most notably the concentrator. Instead, management simply left site. The equipment was turned off by the night shift. This resulted in considerable damage to the concentrator and it took many weeks to clean. Prior to liquidation no responsible environmental management had been practiced at BCL operations. None of the pollution control facilities are lined; there is no evidence of storm and surface water management infrastructure; and there has been no attempt to separate the clean and dirty water being pumped from the mines. Ensuring on-going rehabilitation is therefore not an easy task and the challenges for ultimate reclamation significant. While the mineral concession is considered to be an asset of BCL if it is sold to a third party the rehabilitation obligation “follows” the licence. This is highly significant, as it is not considered likely that any investor(s) will assume that liability, especially considering the overall inadequacy of the historic environmental mitigation strategies employed by BCL. Therefore, the rehabilitation obligation and environmental issues significantly impact the options available for disposal of the assets. Potential solutions to address this problem and to try to realise something for the assets for the benefit of the creditors are being developed. The other issue that makes the disposal of the mine problematic, as a going concern is the failure of BCL to undertake the necessary work to convert the mineral resources into measured reserves. While it is understood there are inferred resources available insufficient work has been done to convert them to a measured reserve. This means that any potential purchaser would have to assume significant risk and cost in order to confirm that the resources are indeed reserves. This negatively affects the value of the mining asset. This coupled with the rehabilitation obligation makes the BCL assets or the BCL Sale Assets a challenge to sell, the liquidator says.

Causes of failure

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The liquidation came about because BCL was unable to pay its debts. According to the management accounts presented in the petition as of 31 August 2016, BCL was factually and commercially insolvent. Statement of Financial Position included in the management accounts indicates the company had an accumulated loss of BWP4, 7 billion, borrowings in excess of BWP1, 095 billion, total current liabilities of P1, 027 billion and current assets of BWP 938 million (of this amount only BWP699 million was considered to be liquid). The cash flow for the year was negative BWP 747 million. This is despite the company having received a cash injection of P 1 billion four months before. (This is the Barclays loan was guaranteed by GRB). It was stated that the company had exceeded its credit with its bankers. The trade creditors were estimated to be P881 million. It was also stated that BCL (or alternatively BCLI) owed US$ 6, 4 million to the Norilsk Nickel group (Lexan and GMR) arising from the Tati SPA. The dispute in respect of the Nkomati SPA was also cited in the petition.As is demonstrated in the Asset and Liability section above these figures were not a true reflection of the company’s financial position. In fact, the position was materially worse. It is evident from the investigations conducted to date, and as discussed and illustrated below, that BCL had been mismanaged for a significant period of time prior to liquidation. Management and board governance was not only poor but largely absent and without continued support from the shareholder (being Government), and with various restructures, BCL would (or should) have been wound up some time ago.While investigations into the causes for failure are on-going, the liquidator has already identified some factors or reasons for BCL’s collapse. Many of these were identified by the Min Corp consultants in their mine optimization report over a year before liquidation and were highlighted in the reports to both board and management, who failed to implement them.One of the most severe and significant impacts of management and board’s failure is with respect to the lack of rehabilitation undertaken by management and the resultant environmental damage caused by the BCL operation and smelter on the Selebi-Phikwe region. While the regulatory environment that is meant to provide environmental and societal protection has not been effective it remains the case that BCL has not complied with its regulatory obligations. The disregard for this is evidenced by board’s approval to utilise the cash funds set aside for rehabilitation to fund operating expenditure in 2015.These environmental issues and the statutory requirements that the land be rehabilitated while significantly impacting the options for disposal of the assets as it is not possible to transfer the mining licence without the associated rehabilitation obligation also, perhaps more importantly, has and will continue to impact the region and the cost of which will ultimately fall to GRB and the taxpayer.

Governance

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The board appears to have had neither the capacity nor the commercial expertise to provide appropriate governance and guidance to the management team. This is not just in recent years. Many of the issues identified as being the root causes for the company’s failure date back four or five years more likely longer prior to liquidation.

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As is clear from the analysis under Section 448 (a) above the financial position as at the date of liquidation was in fact significantly worse than was presented. The inadequate and incorrect financial records meant that the directors were not presented with the correct financial information. The last set of financial statements that was signed by the directors was for the year ended 31 December 2014. That being said, however, even on the information provided the directors knew or should have known that the company was in severe financial distress particularly in the last twelve months of operations and they should have taken action to protect the stakeholders much earlier than they did (and it seems only under specific instruction from the shareholder). This is despite any assurances given by the shareholder. When a company is insolvent or close thereto directors have a fiduciary duty to protect the creditors. The directors failed in this duty.

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While the Statement of Affairs which is required to be submitted by the directors and the company secretary of a company wound up by the court is not intended to address the reasons for failure of the company (it made to provide inter alia details of the assets and liabilities, details of the creditors etc.) the accompanying affidavit does provide insight in to the fact that even after the liquidation of BCL the directors seemed unaware of their responsibility for the demise of BCL and it demonstrates an astonishing level of passivity.

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According to the affidavits the company was undergoing financial distress due to “unprecedented low metal prices” worldwide and as BCL sold its product worldwide the world market dictated the sale price of BCL’s product. Certainly the depressed nickel and copper prices, which fell by over 40% and 20% respectively over a five year period, to 5.38 $/lb and 2.49 $/lb respectively by 2015 did severely impact the company’s profitability and placed additional downward pressure on margins but this was exacerbated by production outages including notably the smelter shutdown which were within the company’s control.

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Moreover, the depressed metal prices was a global trend and not peculiar to BCL as market conditions deteriorated and metal prices reduced many private sector companies took decisions to minimise losses by placing unprofitable operations on care and maintenance. This was not done within BCL and in fact BCL (through BCLI) did the opposite and signed agreements to acquire two additional mines, Tati and Nkomati.

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Tati

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BCL is owed over in excess of BWP740 million by Tati in respect of loans, tolling and transport services. It is questionable as to the level of recovery on these amounts as Tati itself is also in provisional liquidation.

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Nkomati

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This deal was not concluded as at the date of liquidation and is the subject of extensive litigation. Further investigation is needed in to how BCLI intended to finance the acquisition of the Nkomati mine at the time when it signed the Nkomati SPA. It is also unclear why BCL considered that it had the funds to guarantee payment by BCLI. Prior to liquidation BCL and BCLI contend that certain of the conditions precedent were never fulfilled. Norilsk contends that the final conditions precedent was fulfilled in August 2016. It is clear that, if Norilsk’s position is correct, then BCLI was unable to perform in terms of the Nkomati SPA and BCL was unable to perform in terms of its guarantee.

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The board’s lack of understanding of the business is evident in that the directors, even after the liquidation, seem to be of the view that there was an alternative to the winding up and the company would have succeeded had the shareholder continued with its support. The position stated in the affidavit was that the Board had considered three options and their associated cash requirements with the regards to the future of the company. These were listed as being: a. Closure P4, 6 billion; b. Care and Maintenance P3, 2 billion, c. Business Reorganization P2.0 billion

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There are no further disclosures in the affidavit as to the derivation of these amounts. However, it is stated that the board resolved to pursue option C as A and B were considered to be “relatively expensive” in comparison and it was proposed that the shareholder should consider recapitalising the business. It was stated that the directors had made representations to the shareholder to recapitalize the company, requesting a BWP2 billion injection of funding. The first BWP1 billion was required in September 2016 and the second in March 2017 as “equity, loan, guarantee or otherwise”.

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The directors stated they were of the view that while BCL would not make a profit in 2016 or 2017 if the company was capitalized it would close “with a cash positive balance of [BWP] 1billion at the end of 2022” and this was justification for the shareholder to inject additional BWP2 billion.

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Further, evidence of the board’s abstraction of responsibility is confirmed later in the affidavit with respect to the Nkomati SPA, it acknowledged that the company “entered in to a definitive sales purchase agreement with Norilsk Nickel International (sic) for the acquisition of a 50% stake in Nkomati Joint Venture. Given the situation of the unprecedented low metal prices the Board deemed it prudent to re-negotiate the deal and the seller was amenable to negotiate. The Board was therefore absolved from pursuing the negotiations,” (PL’s emphasis).

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The amount in dispute in respect of this contract is US$271 million. While considerable more work needs to be done in to the decisions taken by the directors and the information presented to them and when, which is one of the recommendations for further investigation, it is worth noting that in addition to the board BCL had four sub-committees(Technical, Finance & Investment, Audit & Risk and Human Resources). There is no evidence that sub-committee meetings have been held since December 2015. This was during a period when BCL was severely and critically distressed. This was following 2015, which was the BCL weakest financial year in the previous five years. The Group’s revenue fell to P850 million in 2015, down 54% from the previous year. BCL’s trading performance has been consistently poor over the last five-year period, posting a cumulative operating loss of P4 billion.

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BCL had suffered enormous losses (of P 804 million in 2013 and P 498 million in 2014) and was only kept barely solvent in 2014 by Government converting over P 2, 6 billion from debt to equity. BCL’s enormous loss in 2015 was due in part to the smelter shutdown that was poorly planned and implemented as well as being over budget. The overall cost variance was 6% (from the planned P718 million to the actual P754 million). The planned schedule was 62 days and the actual time taken 112 days. More importantly, though it did not achieve its objectives of increasing capacity usage and investigations undertaken since the date of liquidation indicate that additional work would need to be done to rectify deficiencies in the refurbishment just over a year after completion.

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There was also an impairment provision against property, plant and equipment and trade and other receivables amounting to P 1.9 billion.

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Management

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The assessment of the management team by Min Corp in 2014 and 2015 was that they were inexperienced within the copper / nickel sector and either unable or unwilling to execute against plan. The liquidator has confirmed this. This is evidenced by sizeable deviations between actual results and approved plans. There is also clear evidence of over optimistic metal pricing used in budget forecasts and investment funding decisions.

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Management was unable to effectively re-plan for significant changing events such as the deteriorating metal prices and the smelter refurbishment.

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Of concern is that many remedial actions were identified by external consultants (including Min Corp) and yet very few of the improvements identified that would have gone some way in reducing the overall costs of the mines and increasing productivity were implemented. The failure by executive management to react to the macro-economic environment by aggressively reducing costs, rationalising operations and reducing overheads timeously, despite numerous interventions and recommendations, was a significant contributor to the insolvency of BCL (and Tati and BCLI) which ultimately resulted in its winding up. So while it was the case that global nickel and copper prices were severely depressed many of the actions identified by external consultants were substantially within executive managements’ control.

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Management demonstrated inadequate decision-making and ineffective leadership by failing to implement recommendations of third party consultants as well as internal audit. Four of the main areas where management failed to take adequate steps are with respect to: a) Labour structures b) Budgeting and planning c) Oversight, Competence and Accountability d) Supply chain

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Labour Structure

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BCL was top-heavy and overstaffed. At the date of liquidation BCL employed approximately 5,000 employees with up to a 1,000 of those in a support function. Considering the size of the operations, the staff complement should have been closer to 2,800 – 3,200. The staff complement at BCL for the work being done especially considering the number of services that were out-sourced to third party contractors is considered to be outside industry norms. The organisation was also top heavy with managerial positions. This is of particular concern considering that competence of managerial staff.

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One consequences of the inflated employee numbers is within the mining operations as it resulted in efficiencies and complications with transport to and from the underground workings. For example, three hours per shift spent were spent travelling to and from underground workings for the SEE operations. Another is that there was a housing shortage with families being required to share houses.

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No substantive efforts were made in recent years by management to address this problem. Management did freeze recruitment in April 2015 but did not take active steps to retrench staff. Following the acquisition of Tati there was meant to be a restructuring of staff and management at BCL and Tati. This was considered necessary to align BCL and Tati salaries (Tati’s salaries were significantly higher than BCL). The failure to timeously implement this resulted in a significant and unnecessary cost.

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Despite the overstaffing, the level of overtime worked on monthly basis was high and does not appear to have been appropriately monitored. The cost to the company was significant and evidence suggests that no real efforts were made to assess the impact of this and address the cause. This was compounded by inadequate supervision and lack of adherence to the overtime policy which called for pre-approval of the overtime to allow for justification and approval of overtime before being worked.

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Budgeting and Planning

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There was a lack of both proper budgeting and planning. This resulted in realistic and achievable targets not being set. There was inefficient use of capital and resources. There was inadequate planning and limited foresight with respect to the requirements for capital expenditure.

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Capital funding requirements were unknown both in the short term and long term. The duration of the eight yearly cycle smelter rebuild, which was required in mid-2015, was significantly over-budget mainly due to poor planning and budgeting. This resulted in zero cash flow at both BCL and Tati operations for an extended period.

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The inefficient use of constrained capital and resources contributed to the BCL being one of the highest cost producers in the nickel sector. The information systems in place were not integrated and unable to identify costs, volumes and grades per production areas as well as other standard operational metrics. Metal tracking systems were also not in place to provide timely information to management. Production and overhead costs when benchmarked against other producers indicate that BCL was at the highest end of the cost curve. Contributors to the high costs were identified by Min Corp to be: Extended starvation of capital for the replacement and overhaul of ageing machinery; Overhead costs out of proportion to total operating costs (typically between 25-28% on an annual basis, when compared against a benchmark of 15-20%); and Declining grades and deeper operations at some shafts, leading to haulage constraints, and increased ventilation and cooling requirements.

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The starvation of mine development capital, resulted in the reduced availability of mineable ore at the various shafts, thereby removing the mine’s flexibility to selectively mine economically viable areas on an active basis.

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The liquidator has also detailed and inexhaustive list illustrating lack of oversight, competence and accountability at BCL. This list cannot and should not be considered to be definitive.

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BCL Branch and BCP

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In January 2015 BCL was assessed by the South African Revenue Services (SARS) to be non-compliant with the tax legislation in the processes being followed with respect to spares and supplies purchased in South Africa and the incorrect application of the VAT rate to invoices between BCL Branch and BCP. The assessment of interest and penalties was in excess of ZAR530 million. This amount was subsequently reduced significantly upon appeal to approximately ZAR 30 million.

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However, at the date of liquidation BCL was once again foul of its basic compliance requirements is it had failed to implement the necessary corrective measures following the last assessment. The assessment was in excess of ZAR 80 million.

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This matter has been resolved in the post-liquidation period but it is evidence of the incompetence of management that it allowed the BCL Branch to develop an exposure of this quantum due to incorrect processes for purchasing spares and supplies, even after being assessed the first time.

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Utilities

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There was very little regard for the cost of water and electrical usage on the site either for operations or domestically (employees were provided with water and electricity allowances). Improvements made during the C&M period with respect to both water and electricity usage have been significant with most, if not all, of the actions taken being available prior to liquidation.

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Both domestic and operational usage for both water and electricity were poorly measured and hence poorly managed. Wastage and inefficiency was rife. The monthly electricity bill exceeded BWP 35 million and the water bill exceeded BWP 3 million.

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It has been identified that six of the ten primary electricity meters coming to site were incorrectly wired (which have now been corrected) and as such BCL was forced to rely on the meter readings of BPC which have been identified as giving incorrect readings. The use of compressors was a significant contributor to the excessive monthly electricity bill. The compressor cooling systems were not in a closed loop. A total of around 30MW of compressors are installed on the site. Compressed air systems are inherently very inefficient and only deliver between 2% - 7% pneumatic power with up to 98% of the electrical energy lost to heat generation and leaks. Pneumatic compressors provide poor control for ground handling systems and result in delays and spillages from overfilling or inefficiency with under filling of rock handling conveyances.

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Compressed air was also being used for ventilation. This has associated health risks due to airborne oils. Much of the water being used both domestically and operationally was lost to leaks. This was exacerbated by the aging and poorly maintained infrastructure.

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Exorbitant water allowances were given to employees ranging from 120,000 litres to 400,000 litres per month, per household. Water consumption in excess of allowances was not consistently recovered from staff as required by policy. Most houses did not have a separate water meter in any event so usage was not monitored or managed. While no direct evidence has been found it is believed employees abused the allowance with water being stolen and taken to cattle posts and farms.

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Similarly, the electrical allowances were excessive and ranged from 400kWh to 1000kWh per household. Balances for electricity units were also not monitored leading to some houses having in excess of two times the allowance per the policy. Units were even being purchased for vacant houses on monthly basis without any regard for actual usage.

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IT was another area which was poorly managed. An assessment of the IT infrastructure conducted post-liquidation has identified a number of significant and critical gaps which posed a significant risk to the company. The overall IT system mine-wide was not properly or adequately integrated, managed or even understood. Most of the IT solutions were outsourced this despite there being a fulltime IT manager. Even basic IT requirements were not being undertaken such as monitoring of bandwidth usage and use of firewalls, ensuring proper and adequate backups.

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Some of the infrastructure is out-dated and is no longer supported by the manufacturer.

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Workplace Safety

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During the period under which the mines have been under care and maintenance a number of chronic mining and technical failings have been identified and practices that were well outside of industry norm. These not only made the mine unprofitable but more seriously placed the lives of those on the mine at risk. A series of multiple fatality accidents occurred prior to liquidation. There were fourteen fatalities at the mine since 2014. This is unacceptably high.

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One incident was as a result of a GMT 26 degree decline winder rope parting, sending the uncontrolled man carriage hurtling down the decline. Ten people were in the carriage four were killed and others were severely injured. Rope safety factors of 10 x breaking strength are required for this type of winder along with the destructive and non-destructive rope tests which are a statutory requirement.

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The findings of the independent assessment of the SEE fatalities found the root causes of the failure to be (aside from the specific technical failures of the rope itself): failure to comply with legal requirements, failure to recognise and react to available data; and inadequate maintenance.

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The investigators found that there was a failure to hold people accountable, inadequate processes to review and undertake shaft repair and protect the winder rope, failure by senior management to inspect legal record books (there is no evidence that the engineer or manager had inspected or read the record books). The reporting structures exacerbated the situation as the engineer, who was responsible for the safety of personnel was ranked below and reported to the mine captain, who is responsible for production. This is poor practice and outside of industry norm. It is understood that the mine captains were under significant pressure to improve production which may have resulted in shortcuts being taken particularly with regard to safety.

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The PL has engaged with the Directorate of Public Prosecution (“DPP”) to provide all the necessary information for the DPP to take any action considered necessary as against the company or specific individuals identified as being responsible with respect to all recent fatalities.

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Supply Chain

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Poor and inadequate management of supply chain has also been identified as an area that likely contributed to the failure of BCL and warrants further investigation. It has already been determined that there were instances of noncompliance with supply chain policies, processes and procedures.

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Many of the contracts reviewed so far were generally unfavourable and sometimes punitive to BCL. A number of the contracts reviewed were badly drafted, incomplete and lacking material terms. The prices agreed and escalation rates for some contracts are considered to be excessive.

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There is also evidence of the procurement process being ignored and contracts being entered in to outside of the process. This is a matter that warrants further investigation. One such example appears to be the appointment of the corporate advisors to Polaris II which circumnavigated the proper processes and procedures. The extent of this problem and whether there was any reason behind it aside from poor management has yet to be determined.

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There was also a failure to properly monitor contracts not only in terms of delivery but also in terms of expiration. A number of contracts have been identified that were expired but with no attempts to renew or renegotiate. For example, BCL entered in to a lease agreement with one of the local schools over a decade ago which have not been renewed and the tenant continues to pay the same level of rental as at the end of the contact.

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Further examples where no contract is extant is with respect to electricity supply be BPC. There was no contract with BCP at the date of liquidation notwithstanding that electricity was a significant monthly expense.

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Implications for liquidation

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BCL was placed in liquidation on 9 October 2016 by order of the High Court of Botswana and final liquidation on 15 June 2017. Prior to liquidation, BCL was a nickel and copper mining and smelting facility. The mine is currently on Care &Maintenance. It is one of the three companies, which include Tati and BCLI that form part of a group which are being wound up. The other two remain in provisional liquidation. The liquidation is the largest in Botswana’s history, since the BCL Group was Botswana’s second largest “private sector” employer (after Debswana Diamond Company (Proprietary) Limited). The number of employees terminated was 4,534 for BCL (and 696 for Tati).

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BCL is a large and complex estate, compounded by books and records of the company which were poorly maintained and not up-to-date at the date of liquidation. This has made the winding up very challenging, the liquidator says. Considerable more work needs to be done to determine the state of affairs, and recover and realise the assets of the company as well as investigate the reasons for failure. "This report should be considered as a high-level overview of the activities undertaken in the winding up of the estate. It is based on initial and on-going investigations. Matters reported on, and conclusions and recommendations may change as investigations continue".

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The total estimated gross domestic product (“GDP”) that will be lost due to mine closure (of both Tati and BCL) will be in the order of P 1, 639 billion annually representing about 4% of the current national GDP. The mine closures may result in an annual decrease in total government revenue of up to P 395 million9. The total annual income no longer received by households in Selebi-Phikwe and Francistown is estimated to be P867 million, an including estimated P49 million to lower income households. While the mines directly employed in excess of 5 500 people the mine closure will bring about a loss of approximately 10 400 jobs in Botswana (direct indirect and induced) 10, representing about 3% of the total formal employment in Botswana. Unfortunately, there have been severe repercussions as a result of the liquidation with at least six former employees committing suicide before the process of paying the terminal benefits was concluded.

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Funding of the costs of administration is currently being provided by Government. There are insufficient funds in the estate to maintain the mines on care and maintenance and the secure and safeguard assets without this funding. Under the relevant legislation the PL, as the licence holder must undertake on-going rehabilitation at the mine site. This is being done. Efforts are being made to dispose of the BCL Sale Assets as a going concern to one party who has the intention of recommencing operations. Plans have also been made for piecemeal disposal which includes necessary assessments and studies to undertake a closure of the mine and/or find alternative post-closure usage for the assets should the efforts to sell the BCL Sale Assets be unsuccessful. This is part of the overall LES being developed by the liquidator. 



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