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David McKay, executive editor

Diamond dogs

David Mckay | Mon, 30 Mar 2009 07:31
[miningmx.com] -- THEY say only one in 10 start-up restaurants becomes a commercial success, and that only 20% of these "survivors" make it to a second year - or something like that. I forget exactly, but I wanted nonetheless to establish a similar paradigm for diamond exploration and mining, particularly of the small-scale sort.

Why are diamond miners, among all the mining sectors, so given over to misadventure? And also, why does diamond mining attract more than its fair share of scoundrels and rogues?

There's abundant evidence that diamond mining stocks are riskier than a night out in Bogotá. Group all the gold and platinum stocks to have hit the wall in the past 10 years together, and you'll still find them soundly outnumbered by our hapless diamond miners. Certainly, entry barriers are lower, but the drop-out rate is something to behold.

In the following list, I have named honourable failures - this is not a list of villainy by any means - and it includes Kimberley Diamond Company, Good Hope Diamonds and Brett Jolly (he of the green resinous mass that "someone" claimed to be the largest diamond find ever).

It extends to the likes of Namibian Minerals Corporation (Namco), Afgem and the late Brett Kebble whose last business deal was shadiness in the farther reaches of Angola's diamond fields.
I struggle to understand how Panda's planned istings are going to fly
So imagine my distress to see news that another marine diamond junior is threatening to list on the JSE (AltX actually), this time courting sympathy with animal activists the world over by naming itself Panda Marine Mining and Exploration.

According to a Panda Marine press release, which a colleague of mine at Fin24.com happened upon through one of the many press release portals, Panda's raison d'être is a tax incentive recently gazetted in parliament allowing it, Panda claims, to write off 100% of its investment against income from July 1.

Sadly, there's no mention in the press release of any actual assets that would generate income so I popped over to Panda's website to see what I could find. Unfortunately, there's precious little in the way of additional information, other than plans to mine in the Groen River mouth just north of Saldanha Bay up to Bitterfontein on the Cape west coast.

The rest looks pretty dire. The home page has a quotation attributed to Kahlil Gibran, and the section page titled "Operations" has a notice that "Access to this page is limited to authorised personnel", though a keypad is included, presumably for a password.

Kobus Pansegrouw is the CEO and has had some press coverage, but I struggle to understand how Panda's planned AltX, AIM and TSX listings are going to fly based on what I can see.

History against Panda

The history of marine diamonds is eventful, to say the least. Add Trans Hex and Alexkor to the list of those who have tried and failed to make money by sucking up diamonds from the sea floor, not to mention Wealth4U, a company from which Panda feels compelled on its home page to distinguish itself.

De Beers continues to make a go of the marine diamond business, but it's not much of a place for juniors. But then, diamonds in general are treating our entrepreneurs badly.

Consider all the alluvial mining firms that have virtually shut up shop, including BRC DiamondCore and Rockwell Diamonds, forced by low diamond prices to cut production or face running out of money.

Perhaps one of the reasons the alluvial (riverside) diamond miners struggle so is that they depend on shifting huge volumes of dirt to find the single stone that pays everyone's salaries for the next three months.

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Cash flow dries up remarkably quickly, however, if you can't get the revenue you expected for the big stone. It's a marginal business and investors ought to treat alluvial mining investing with caution. In any event, the situation won't improve until diamond prices start to revive.

Anecdotal evidence is that Trans Hex recently sold a parcel of diamonds at prices 30% higher than it expected. But if there's light on the horizon, the experts aren't saying so. A recent report from RBC Capital Markets suggest diamond prices, which fell sharply in the last quarter of 2008, will have fallen again in the March quarter.

It said: "In addition, the swift and acute fall-off in retail demand has left the diamantaires, cutters, polishers and manufacturers with excess inventory and limited access to credit to rough diamond purchases, resulting in a virtual freezing of the diamond pipeline, limiting purchases of rough diamonds."

Golden days

As mentioned in a previous column, the gold sector is back with a bang.

Reserve Bank governor Tito Mboweni has joined the central bank charge to hold gold rather than divesting of it. According to a recent I-Net Bridge report, Mboweni will "begin to increase the proportion held in gold slowly". About 11% of the country's total reserves are in gold, but there's no target on how much the bank will accumulate.

That mirrors the global shift towards gold as that store of tangible wealth. But I was intrigued by a recent Goldman Sachs report which has provided a new framework for assessing gold's prospects.

According to the broker, it wants to start evaluating gold as "a commodity" in addition to its tangible counterweight to so-called fiat currency.

According to Goldman Sachs, massive demand in gold exchange-traded funds (ETFs) is one of the reasons we can start thinking of gold in a similar way to nickel, aluminium, tin or lead.

Holdings by gold ETFs totalled 33 million ounces by the end of 2008. This represents a mere 3% of all monetary gold holdings but it's the growth that's the important thing, says Goldman Sachs.

In the last 12 months, for instance, some eight million ounces of gold has been mopped up via demand for gold ETFs. Now, Goldman Sachs says, gold ETFs are equal to about a third of all the other private sector investment purchases in gold.

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