By noon on the 29 January, this convoy was only ten miles from their destination and the British tug Frisky was ready to take the store ship in tow. When they were eight miles off Skaggi Point light, near the entrance to the swept channel to Reykjavik, the USS Alexander Hamilton (WPG 34) cast the tow line and proceeded slowly ahead. At 16.10 hours, U-132, which was patrolling off Reykjavik since eight days, fired a spread of four torpedoes at the little convoy, one of them struck the cutter amidships and destroyed all engines, including the emergency diesel generators, so no heat, steam, nor electricity remained. The other torpedoes missed their targets.
At 16.45 hours, the ship was abandoned, the survivors were picked up by Icelandic fishing trawlers and were taken to Reykjavik. The British tugs Restive and Frisky and the US Coast Guard tug USS Redwing tried two times to salvage the USS Alexander Hamilton (WPG 34), but without success in the heavy seas. The USS Ericsson (DD 440), USS Livermore (DD 429) and the seaplane tender USS Belknap (AVD 8) screened the salvage operation.

At 13.15 hours on 30 January, the Frisky took the ship in tow, but at 20.28 hours she suddenly capsized. The USS Ericsson (DD 440) then fired three rounds into the hull and left. As the cutter was reported still afloat in the evening, the destroyer returned to the scene, but found only an oil slick.