A consortium of Adroit Capital, White Oak Global Advisors and OM Holdings was announced as the preferred bidder for Tasmania's Liberty Bell Bay in May.
The smelter, formerly owned by controversial businessman Sanjeev Gupta's GFG Alliance, stopped production in May 2025 and was placed into administration in March.
On Friday, workers were told Adroit Capital was no longer engaged in exclusive negotiations with the administrators.
Difficulties had arisen with critical financing, supplier and government arrangements, administrator EY Parthenon said.
The federal and Tasmanian governments contributed $5 million in May to secure pay for the smelter's 216-strong workforce.
The money was conditional on the consortium providing funding for non-workforce operating costs to enable accelerated confirmatory due diligence and completion of the proposed acquisition, EY Parthenon said.
In the absence of a commercially viable transaction and funding required to continue operations, the company was consulting with workers regarding their employment, it said.
Urgent discussions were under way to secure further funding so an alternative pathway could be pursued, it said.
"We recognise this further uncertainty for employees, their families and the wider Bell Bay community is difficult," EY Parthenon's Morgan Kelly said.
"We are working to provide clarity as quickly as possible."
The smelter produces critical ferroalloys for steel manufacturing.
The federal and Tasmanian governments would "stand with" workers during a difficult time, they said in a joint statement, however, there was no mention of further funds.
"To date, to support workers' wages through the administration period, the commonwealth and Tasmanian governments have announced a total $9.6 million across three packages," they said.
"We recognise this is a difficult and uncertain time for workers and their families, as well as the community and small businesses.
"Support is available through commonwealth and Tasmanian government services."
On Wednesday, the federal, South Australian and Tasmanian governments announced a $105 million funding support package to keep two Nyrstar smelters operational.
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