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Tough times dull diamond stocks
Brendan Ryan
Posted: Fri, 10 Oct 2008
[miningmx.com] -- IT’S HUNTING SEASON IN the diamond and gemstone junior mining sector as share prices collapse across the board and investors ignore the kind of good news that just six months ago would have sent such shares soaring.
Toronto- and JSE-listed Rockwell Diamonds is fighting off a hostile bid by Swiss-based Pala Investment Holdings, while London AIM-listed Tanzanite One is under attack from AIM-listed Gemfields, which is controlled by JSE-listed Pallinghurst Resources.
Pala is offering C$0,36/share for Rockwell, which currently sits at around $0,30 and has traded between $0,16 and $0,70/share on the Toronto Stock Exchange over the past 12 months.
Gemfields is offering 45p/share for Tanzanite One, which has ranged in price over the past 12 months from around 110p to a low of 25,5p/share immediately prior to the Gemfields bid.
Response from both
takeover targets is the offers being made “significantly undervalue” their companies.
But that’s the picture throughout the diamond junior sector – not to mention the entire junior mining sector, where share prices have been hammered into the ground irrespective of the fundamentals of the various businesses.
Classic examples are JSE-listed Trans Hex and AIM-listed Petra Diamonds, which is now SA’s second largest diamond producer after De Beers, from which it’s bought a number of assets, including the Koffiefontein and Cullinan mines, as well as the Kimberley Underground operations. Early in September, Petra also agreed to buy De Beers’ 75% stake in the Williamson mine in Tanzania.
The acquisitions will boost Petra’s diamond production from 200,000 carats in the year to June to more than 1m carats in the year to June 2009.
Petra’s track record at Koffiefontein has proved its management can successfully turn such marginal mines around. RBC Capital Markets analyst Des Kilalea says Petra will hit its 1m carat/year production target ahead of previous forecasts, while Petra will still hold US$25m in cash after its Williamson acquisition.
Though both Kilalea and BMO Capital Markets analyst James Picton rate Petra an “outperform but speculative” stock, its share price has continued to fall. Petra’s price sat at around 150p at end-2007 but
dropped to a low of 73,5p/share on 22 August. Its price then recovered to 107p on news of the Williamson deal but has started sliding again to sit currently at 102p/share.
De Beers is now in discussions with Trans Hex about its Namaqualand mines division, which it had previously indicated it wanted to merge with Alexkor, a joint venture between the SA Government and the Richtersveld community.
That’s the best news to emerge about Trans Hex in years, as the company’s share price was beaten down mainly due to operating problems in Angola that have had severe financial consequences. Trans Hex has also sold off its Saxendrift operation along the Middle Orange River to Rockwell and discontinued its deep-water marine diamond mining operations off Namibia’s coast.
That currently leaves Trans Hex overwhelmingly dependent on its Baken and Richtersveld alluvial mining operations. Baken mined 71,856 carats of the total 107,305 carats Trans Hex produced in the year
to end-March.
De Beers estimates 2008 production from its Namaqualand mines at 330,000 carats and, as spokesman Tom Tweedy says: “Trans Hex has successfully mined alluvial diamond deposits in the area that are lower margin than our own.”
An executive at another diamond producing company says: “Trans Hex should be able to make a go of this. It’s their kind of mining in the same region where they are already operating successfully.”
Yet Trans Hex’s price has dropped from around 875c when the news was announced early in September to current levels around 750c/share, just above its 12-month low of 720c.
AIM- (and JSE-listed) DiamondCorp has also seen its price plunge from a 12-month high of R15 to R9/share currently. However, DiamondCorp is in the fortunate position of having already raised all the funds it needs to bring the Phase 2 underground development of its Lace kimberlite diamond mine in the Free State into production.
DiamondCorp CEO Paul Loudon says his priority is to get the mine into production and he’s not being tempted to expand by going after some of his distressed fellow diamond miners.
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