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Llewellyn Delport, CEO Trans HexLlewellyn Delport, CEO, Trans Hex

Trans Hex on the up again

Brendan Ryan | Mon, 13 Jun 2011 14:34

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[] -- IF ONE thing can be stated with certainty about Trans Hex’s recent performance, it’s that the market loved it despite posting a taxed loss of R45.1m in its last financial year.

Trans Hex Group shares jumped 6% to 280c on May 30 (when the company released a preliminary trading statement) and have carried on up since, reaching 330c on Monday.

That begs two questions: First, why? Second, has Trans Hex finally turned the corner after plunging from around 1,800c early in 2007 to as low as 100c during 2009?

The first question is by far the easier to answer. The market was expecting a bigger deficit, given that Trans Hex had reported a loss of R101,4m on its South African operations at the interim stage. Instead, Trans Hex dramatically turned around its SA operations in the second half of its 2011 financial year when they generated a profit of R116m.

Whether Trans Hex has fundamentally changed its operating circumstances for the better is a lot more dangerous to predict, given the share’s partial recovery and subsequent collapse during 2010.

CEO Llewllyn Delport appears cautiously optimistic and points to the fact that – unlike many other diamond companies – Trans Hex has managed to come through the torrid market conditions of 2008/2009 without having to call on its shareholders for financial support.

What’s clear is there have been a number of fundamental changes to the business over the past 12 months. Angola appears – at long, long last – to be firmly under control, with Trans Hex not required to put any funds into the country since May 2010. The Luana mine is profitable and Trans Hex brought back $3.5m to SA from that operation. Trans Hex is also on the verge of getting shot of its disastrous Fucauma and Luarica operations, which have been mothballed since mid-2009. The Angolan partners want Trans Hex out, and Delport is more than happy to oblige.

In SA, Trans Hex has achieved greater freedom following the decision by Remgro to unbundle its 29% stake in the company. Both parties have made major moves since then. Remgro chairperson Johann Rupert has invested in two new diamond ventures through Luxembourg-headquartered Reinet Investments – and with mining partners other than Trans Hex.

For its part, Trans Hex has now agreed to buy the Namaqualand Mines division from De Beers – a deal it first looked at in 2008/2009 but called off due to adverse market conditions.

Asked what he thought of Rupert’s decision to go diamond mining through Reinet with alternative partners, Delport replied: “You should ask Johann Rupert about that.”

Rupert, in reply to emailed questions, says: “This deal should be seen in conjunction with bigger investments that have already been concluded in other hard assets/hedging deals.”

It’s clear major change is in the air and if Trans Hex has convincingly turned the corner then it’s done so at just the right time.

The message from the RBC Capital Markets annual diamond conference held recently in London was a highly positive one, with predictions that the diamond sector may be “on the threshold of a purple patch”. RBC analyst Des Kilalea says: “As De Beers suggests, the market may well be on the threshold of a purple patch as two new and growing markets start buying diamonds in a market where new-mined supply is likely to grow slowly, if at all.”

Those two new buyers are China and India, which is highly encouraging for the diamond market that is overwhelmingly dependent on the United States – currently accounting for around 50% of jewellery demand.

- The article first appeared in Finweek

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