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How to evaluate junior diamond firms
Theo Botoulas
Posted: Wed, 09 Jan 2008
[miningmx.com] -- THE wealth created by the current bull market (which Peter Major believes is nearing its conclusion in an article elsewhere on Metal Heads), has resulted in strong demand for diamonds and the development of a new universe of both listed and unlisted diamond explorers and miners.
The challenge for those desirous of investing in the “diamond space” is to benchmark and compare this universe of “junior diamond Companies” in a relevant manner in order to make a considered and informed investment decision.
Diamond companies can be valued using earnings with the market ascribing a multiple to determine fair price. However, this method is only meaningful for companies which have producing assets, which junior diamond companies seldom own, although Gem Diamonds, Trans Hex and Petra Diamonds are notable exceptions.
Few methods have been developed for junior
diamond explorers which are primarily concerned with early stage exploration, or which have a large exploration portfolio supplementing their producing assets.
An example of the type of method developed for benchmarking purposes in the gold industry, which is not readily available in the junior diamond sector, is the market value of a gold explorer per ounce of reported resource. However, this requires
the definition of mineral resources into internationally recognized categories on a similar and comparable basis for all diamond juniors, which may be more easily said than done.
There are a number of determinants investors can use to assess diamond companies. These include the relative scarcity of diamond production compared to gold and platinum for example, the segregated nature of the diamond market and the nature of a company’s production be it gem or near-gem quality stones or industrial diamonds.
Investors should consider the segregated nature of diamond deposits, which range from kimberlite pipes, fissure systems or alluvial deposits in river systems and the sea. These all involve unique operating cost structures. The location of the deposits is another critical factor to consider when evaluating diamond companies as well what strategy they adopt with their assets.
The skills within a company are vital to build, develop and operate diamond plants
in the current environment of skills global shortages, while the security policies a company has for its diamonds has to also come under consideration.
All the above factors determine the likelihood of a Company proving sustainability over time. Diamond juniors are perhaps exposed to a larger measure of risk than their peer group in other commodity types.
The fact remains that in the order of 1% of kimberlite pipes are economically viable and become mines. The amount of time required to bring a new kimberlite to account from the time of discovery to mining has varied in the past from between four and twelve years.
At present, there are no new major mines on the horizon with the major discoveries in which junior Companies have an interest being the AK 6 pipe in Botswana (African Diamonds) and Alto Cuilo in Angola, in which Petra Diamonds has an interest.
A good example of a junior diamond Company which has proved sustainability over time is the
South African alluvial miner and explorer Trans Hex Group Limited, a Company which has a core and supportive major shareholder, technically capable management over a wide array of disciplines, a sound reputation and integrity with regards to diamond audit and security, an ability to deliver “on the ground”, a solid portfolio of assets, a niche gem quality production and a very strong “culture of diamonds”.
These attributes, which are developed over time and to which the new entrants to the industry aspire, are the key to the creation of a successful and sustainable junior diamond Company which is able to withstand the uncertainties and risks associated with the exploration for, and operation of, diamond deposits through the exploration to production cycle.
The selection of junior diamond Companies on offer to investors is therefore not dissimilar to the diamonds which these Companies aspire to discover or produce. Some are of differing quality, others may display
internal flaws or weaknesses, all are of varying sizes, yet each one is unique.
Ultimately, the decision to invest in a particular Company may be a matter of opinion and at the discretion and to the taste of each individual investor.
This new universe of diamond juniors will report results, disclose and present reserve and resource statements, strategies, and plans for both current and future projects. Because of the scarcity of productive kimberlite or alluvial deposits, very few will be in a strong cash generative position and will have the ability to disclose earnings metrics in the short term.
Ultimately, the management of these the diamond juniors can only deliver projects and report results, and the market analysts, fund managers and investors will deliver the techniques and benchmarks to ascribe a value to, and rank, them.
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