Our client established a stone quarry in 2010 to take advantage of the looming supply gap of stones in the building and constructions sector. The quarry was strategically situated in Akamkpa, Cross River State to take advantage of the ample granite reserves in the area.
For a quarry to operate efficiently and profitably it must have, at the very minimum, a fully functional crushing plant, adequate blasting and earth moving equipment and a suitable fleet of logistics vehicles.
Following the company’s inability to raise sufficient equity or long term capital at inception, the investment was financed by a mix of owner’s equity and a five-year equipment lease on the crushing plant from a commercial bank.
In their determination to commence operations in spite of limited resources, the company acquired some used equipment – a blaster, 2 dozers, 2 dump trucks and a weigh bridge. A used generating set was also installed.
Over time it became clear that these equipment were inadequate (in quality and quantity) to support a large crushing plant like theirs. The company experienced significant downtime due to incessant equipment failures leading to significant losses in the face of heavy overhead expenses.
By the second year of operations, due to persistent failure by the company to meet payment obligations, the bank suspected that funds were being diverted. They decided to appoint a consultant to take over management of the operations. It is reported that the consultant made some terrible procurement decisions, buying still more used equipment that were not fit for the company’s operations.
By the fourth year, the cost of bad decisions, bank interest and penalty charges had grown the loan balance to more than twice the original principal amount, the company invited us to help salvage the situation.
After reviewing the company’s audited and management accounts, it was apparent to us that some very bad financing decisions had been taken – by the company and the bank – from the beginning. A visit to the facility further confirmed these observations and revealed some other operational problems. A few examples:
The company decided to install a large crushing plant while other successful operators in that market had small- or medium-sized plants. It evidently wanted to be the biggest player in that market, but apparently did not consider the financing and operational implications.
It was clear at inception that the company did not have, and could not raise, enough capital to fund its dreams. Rather than scale down or wait until it could raise sufficient funds, it decided to go ahead with its plans.
The bank also managed to convince itself that it was safe to finance the plant because it was brand new, forgetting that the plant alone could not generate revenues to service the loan
The loan was poorly structured. There was no moratorium to take cognizance of the time it takes to order, assemble, deliver and install a plant of that size. As it turned out, it took 9 months for the plant to arrive. The company did not start seeing revenues until the 13th month.
The company was poorly managed by the owner – an absentee CEO who had his hands full with other political and business pursuits. There was talk of an expatriate GM, but we never met him. He was said to have taken a long vacation at the time of our visit.
The Procurement Manager, the owner’s relation, was a law unto himself. He made it clear that he did not welcome our presence there. Very few of the staff had the competence and experience to function effectively in their roles.
The bank, in its attempt to salvage a bad loan situation, complicated matters by appointing a contract manager who was later found to be incompetent and unprofessional. We gather that this manager was also doing his job by proxy, visiting the plant only once a quarter or so.
In fact, some staff of the company were of the opinion that the contract manager was fronting for a senior staff of the bank. They couldn’t understand why he was retained long after his incompetence had become glaring.
Based on these observations we recommended a three-pronged approach to resolving the company’s challenges:
Audit the company’s bank account to determine which of the numerous bank charges were valid and justified. This would form a basis for a negotiated settlement with the bank.
Package the company for presentation to a new investor in order to refinance the bank loan and restructure the balance sheet.
Make some important human capital changes. To position the company for the future we advised the promoter to assume the Chairmanship position and engage a full-time CEO for the company. After reviewing the expatriate GM’s profile we advised that his contract be renewed. With the approval of the client we engaged an HR specialist to develop job descriptions for each of the key roles and help with rationalization.
After a thorough audit of the company’s bank statements we found solid grounds to contest almost N500 million of the bank’s N1.3 billion claim. After negotiations we convinced the bank to write off N290 million and agree to a repayment schedule that was more comfortable for the company in view of realistic cashflow projections.
We prepared a new business plan and presented the proposal to a number of development finance institutions, venture capital companies and private investors. Due to the promoter’s reluctance to part with equity for fear of losing control we were unable to attract an equity investor.
We were however, able to secure a N900 million 10-year loan, with a 1-year moratorium, at single digit interest rates, from the Bank of Industry. N500 million was used to partially pay down on the commercial bank loan while the balance would be repaid in monthly installment. About N300 million was applied towards purchase of new operational equipment while the balance was used to finance working capital.
The company is now much more stable. Its market profile has risen – it is no longer the laughing stock of the Akamkpa business community. It has signed several long term supply contracts with some major construction companies, one of which is handling several projects financed by the Niger Delta Development Commission (NNDC) .
Cashflows are steady. Financial obligations are being met on time. After correcting some past recruitment errors and hiring some more competent hands, morale has been boosted. Employees feel more secure and appear more committed to the company. The company's employee head count is actually 25% higher than when we started, but the efficiency ratios are sound.
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