Trans Hex future in Angola uncertain

Allan Seccombe | Tue, 10 Nov 2009 16:24
[miningmx.com] -- SOUTH African junior diamond producer Trans Hex turned in a sound set of interim results after it put its Angolan operations into care and maintenance and their presence in the company’s future is not entirely clear.

Trans Hex is a junior partner in two diamond operations in Angola and the partners took the decision to put Luarica and Fucauma into care and maintenance pending an uptick in rough diamond prices.

The bottom fell out of rough diamond prices late last year when the global financial and commodity markets ran into difficulties. Diamonds, which are a luxury item, have been particularly hard hit with consumers shying away.

Trans Hex has a record of walking away from investments that aren’t profitable, a prime example would be its marine diamond mining business. It has shut that down and sold one of its ships.

“We have proven over a period of time -- whether it was with the deep-water vessels or other businesses -- prudency in commercial decision making and we are in the same space with Angola,” said Llewellyn Delport, Trans Hex CEO.

There was no comment in the group’s results about when Fucuama and Luarica would be restarted, but Delport told Miningmx the partners in those two operations needed a “significant” recovery in the price of rough diamonds to re-open them.

Using Fucuama as an example, he said rough prices needed to rise above $200 per carat for the partners to make the decision to viably restart the mine.

Fucuama is 32% owned by Trans Hex and it has a four-year agreement to manage the mine to 2011 and that deal that can be extended if the other partners are satisfied. Trans Hex does not manage its 35% held Luarica mine.

Trans Hex told the market at the release of its annual results in May this year that it had taken a R460m impairment against the two mines and that they had been put into care and maintenance.

The rest of the equity is held by the Angolan government through state diamond firm Endiama or by nominated private Angolan investors, all whom are entitled to a “free carry” because they do not have to put up any of the capital required to build the mine.

These mines have had a long history of disappointing results, variable output and Trans Hex has invested hundreds of millions of rands in them.

Luana, the third asset in Angola which Trans Hex is pushing hard on, has trial mined 26,000 carats of diamonds and needs the mining contract to be negotiated and concluded before those stones can be sold.

Trans Hex is pushing for a more favourable operating agreement than at its other two investments there. The Luana agreement is expected to be signed before March 2010, the end of Trans Hex’s financial year.

Luana is a 10 million carat deposit. “We are firmly of the view that it is possible to get going, given the right contracts, a world class alluvial operation there. However, we are also of the view that if conditions don’t allow you that you should be wise and brave and not continue,” Delport said.

The downturn in diamond prices has left a number of diamond companies, particularly juniors, in financial distress and this has opened the doors for Trans Hex to look around for growth opportunities, he said.

Trans Hex has swollen its cash holdings to R267m, more than double what they were this time a year earlier. The company is being cautious with its cash and Delport declined to say what it would be used for. No dividend was declared.

Trans Hex forecasts its South African operations to produce 100,000 carats in the full financial year 2010 after output of 45,502 carats in the first half. Total sales of $45m meant an average price of $912 per carat.

“Diamond prices and demand came under significant downward pressure in the latter half of the previous financial year. The current period saw prices stabilise and increase with all production being sold,” Delport said.

Trans Hex posted a profit for the six months to end-September of R9m against a loss a year earlier of R64m and a full-year loss of R798m.

Delport attributed the sound results to “stringent cost management” and reversing the cash generation performance of the operations which saw inflows of R42m from a net outflow of R97m a year earlier.