TGR: Do any of the juniors have a chance?
DK: Yes. The key is having production in categories less vulnerable to economic downturns, where prices might be stable or fall only slightly. In other words, bigger diamonds, better quality diamonds, better color diamonds, etc. So juniors that are generating cash are okay, such as Petra Diamonds (PDL.L, PDMDF.PK) and Gem Diamonds Ltd. And there’s another one that’s developing a mining business that has cash because it did an IPO at the end of last year and got itself $185 million. That’s Namakwa Diamonds (NKWDF.PK, NAD.L, NMKWF.PK, NAD.VX). South Africa, DRC, Namibia, and Angola—that’s where Namakwa is trying to build its business. Because it has money, it can afford to keep its head down and develop its alluvial mines, with the firestorm in world markets leaving it unscathed.
Gem Diamonds owns three producing mines. The Letšeng mine, which produced that lovely stone we spoke about, is in Lesotho; a little country in the middle of South Africa. Gem also owns the Ellendale Mine in Australia and the Cempaka Mine in Indonesia. They raised $630 million at the beginning of last year. They’ll be able to fund all their mines with that cash; the company has sufficient money to see itself through pretty close to the development of the Botswana mine. And it’s a cash positive business in total.
Petra has three so-called “fissure” mines in South Africa. Fissures are skinny, horizontal or vertical ribbons of kimberlite. Petra also bought three old De Beers mines in South Africa and another in Tanzania, which it is rehabilitating. Times are tough; it can always slow down the development of one of its mines, and while it will need capital to develop one of those acquisitions, it is generating cash. Like Gem, Petra produces diamonds valued at more than $300 a carat. Given that the world average is $100, you have lots of diamonds going at thousands of dollars a carat to get to $300.
These kinds of companies probably are less vulnerable to what’s happening, but their share prices have all flattened. Even though they’re cash positive, Gem’s come down from $12 to $7; Petra’s down to £1. Namakwa fell from £1.90 to below £1. They’ve all come down quite hard.
TGR: Could these be potential buying opportunities for long-term investors? DK: Nobody wants to buy things at the moment. People just want to sell things. But in a year or two we’ll look back and say, “Gee, weren’t they fantastic opportunities?”
TGR: So are these pretty illiquid? DK: No, those three are fairly liquid. What’s been happening with Petra is that SAAD, a fund in Switzerland, has been buying it and now owns 38% of the company. I imagine they’re taking a long-term view and saying, “At these prices, in three years’ time, we’ll look like absolute heroes.” It’s a good business that doesn’t have to come to the market for cash in a hurry.
If you’re running a mining fund or one of these small special-situation funds or hedge funds and a lot of people start to redeem, you have to sell. You sell what’s liquid, and these are liquid stocks.
Some of the little ones just can’t sell, so their prices go down quite hard but in low volume. Pangea DiamondFields PLC (PDF.L), which has a high quality management trying to develop some alluvial mines, has a share price at 17p; it was probably 40p not much more than three months ago. A lot of good little companies are going down on no volume. They’ve been beaten very badly.
TGR: There are a few other companies we’d like to hear your thoughts about. One is Motapa Diamonds (TSX:MTP). DK: Motapa is interesting. Its principal focus is a kimberlite in Lesotho called Mothae. It’s near Letšeng, which has produced four or five of the top 20 diamonds in the world. Motapa didn’t have the funds to explore Mothae properly, so they did a deal with the Bannockburn Resources (part of the Lundin Group), where they basically allowed Lundin to earn up to 70% by spending $10million in exploration. I suppose there is a reasonable probability of it being economic, but I think it’s way too early to say, though there have been some encouraging bulk sampling results and even the recovery of a 23ct diamond some weeks ago. I know some of the guys involved, and that’s about as close as I’ve been to it.
TGR: One last one, Des. Does Banro have a diamond company in DRC? DK: Banro owns 15% to 20% of BRC DiamondCore (TSX:BCD, JSE:BCD), which has assets in South Africa that came through the merger with DiamondCore, and in the DRC. In the DRC, they also have several alluvial diamond prospects and a kimberlite exploration program. Mike de Wit, who runs the DRC part of the business, has earned great respect in the diamond industry and in the DRC—because he’s been there for a long time. He was with De Beers—but he is something of an alluvial expert and regarded as a one of the real experts in sedimentology. I know Mike and I know the Banro guys. We don’t cover it, but BRC’s share price has been as dismal as so many others.
That said, their prospects in the DRC may be better than most, and Mike is one of the reasons why. A lot of people believe that he probably understands what’s happening in diamond geology in the DRC better than most. And as I say, the DRC could be the world’s next big diamond field.
London-based Des Kilalea, Global Mining Research Analyst at RBC Capital Markets—the corporate and investment banking arm of Royal Bank of Canada (NYSE, TSX:RY)—focuses on AIM mining companies and on diamond producers. Before joining RBC, he was head of sales for Nedcor Securities in Johannesburg, with special responsibility for mining sales. He also handled diamond and diversified mining company research at Fleming Martin, a Johannesburg-based stockbroker. An accomplished journalist as well as premier diamond analyst, he won Financial Journalist of the Year honors for his work at Finance Week (1989).
Courtesy: www.theaureport.com
