When Trans Hex skulked off the JSE at the end of 2019, few punters gave the beleaguered diamond mining group a snowball’s chance of surviving … let alone ever thriving again.
At the time of its delisting Trans Hex was staring starkly at a handful of serious challenges.
The traditional Orange River alluvial concessions were all but mined out, while the Namaqualand mining operations acquired from De Beers for R225m looked, smelt and felt like an expensive dud. The balance sheet was no longer brimming with cash, and it was difficult to get cash out of the company’s one promising lifeline – the Angolan diamond operations. What’s more, long-held plans to build a marine diamond beach-head – initially thwarted in the late Nineties when Trans Hex failed in its bid for Ocean Diamond Mining Holdings (ODM) – had lost momentum.
By the time of the delisting Trans Hex carried a market value of a little over R50m – which made the buyout offer, at double that price, a little quizzical to industry observers. Perhaps even more startling was that the prime movers behind the buyout offer were astute and experienced investors – in the form of retail tycoon and serial risk taker Christo Wiese and Astoria Investments (then in the guise of RECM and Calibre), which is headed by top fund managers Piet Viljoen and Jan van Niekerk. Wiese, ironically, had played a key role in Trans Hex losing out on the ODM prize and settling for a poor consolation prize in inferior marine gem business Benguela Concessions.
Not long after the 2019 delisting there were still ominous signs that salvaging value of Trans Hex would be difficult.
In a 2020 annual report, Viljoen was disarmingly frank in admitting that Trans Hex had been a “consistently noticeable drag” to the investment company’s results. “With the benefit of hindsight, we should have passed on this opportunity when it was first presented to us.”
Viljoen probably thinks a little differently about Trans Hex now. The first clues that Trans Hex might have managed a most unexpected turnaround appeared in April 2022 when a restructured and recompiled Astoria disclosed a R3.5m dividend from the diamond miner.
This article appeared in The Mining Yearbook 2024. Click here for the microsite and downloadable PDF
Performance was driven by a solid showing from the Somiluana diamond operations in Angola – which was then able to repatriate profits. It seems getting Trans Hex out of the public eye allowed management to grasp the nettle with vigour. In Astoria’s financial report Van Niekerk said that being unlisted enabled the Trans Hex management team to move fast and effectively in restructuring the business. He remarked: “Little did we know that positive operating results would occur so soon. We have a committed management team, an appropriate operating model and a like-minded partner. With this foundation in place, we are looking for ways to expand the business.”
Knuckling down
It seems one of the big swings in Trans Hex’s progress as a private company was the appointment of Marco Wentzel as CEO. Wentzel might be remembered as a towering and intimidating Springbok lock. He is also Wiese’s son-in-law.
At the time Van Niekerk stressed that as a private company Trans Hex management had the freedom to transform the business. “There are no circulars, no drawn-out shareholder voting processes, no opportunistic shareholders holding the company to ransom because of arbitrary differences of opinion about valuation, and so forth. Just management rolling up their collective sleeves and getting on with the job, supported by shareholders who understand exactly what is happening and are therefore prepared to take the risk of providing capital to management at a fair price to help them achieve their aims.”
In mid-2022 Trans Hex took its next big step when it acquired International Mining and Dredging Holdings – renamed Trans Hex Marine Group (THMG). Astoria has a significant minority position directly in this business.
THMG is actively involved in marine and offshore mining and exploration and operated several mining vessels off the diamond-strewn West Coast of South Africa and Namibia. It looks a most interesting prospect. At the end of 2021 THMG boasted net assets of only R158m but recorded profits of R108m.
Astoria argued that marine diamond mining has a more predictable production profile than land-based alluvial diamond mining and the vessels (which in essence are floating mines) can follow the resources, allowing it a much larger scope of mining area.
Although – as an unlisted company – there is no proper sight of Trans Hex’s financials, there are interesting glimpses to be had through Astoria’s financial reporting.
There are no circulars, no drawn-out shareholder voting processes, no opportunistic shareholders holding the company to ransom … Just management rolling up their collective sleeves and getting on with the job – Marco Wentzel, Trans Hex
For the year to end December 2023, Astoria reported that Trans Hex experienced the sharp decline in diamond prices across all grades and sizes. The group also bemoaned the “supposed rapid adoption” of lab-grown diamonds by younger generations of Western consumers more interested in costume jewellery than luxury as well as the flooding of the market by illicit Russian diamonds. But Somiluana Mine’s production remained stable and profitable – although, this time, no funds were repatriated.
Astoria valued its investment in Trans Hex at a 32% discount to net asset value (NAV) to reflect the risks relating to repatriating capital from Angola. Van Niekerk said the Trans Hex NAV was reduced by 44% during the year because lower diamond prices render parts of the Somiluana Mine’s resources uneconomical and reduced the expected life of the mine.
Thus, the value of Astoria’s then 25% investment in Trans Hex dropped from R83.2m to just R46.4m. That still infers a value of R184m for Trans Hex – markedly ahead of the value on delisting almost five years ago.
Return to public life?
There’s a distinct glimmer at sea, though. Like its investment in Trans Hex, Astoria values its stake in THMG at a 30.5% discount to its calculated NAV. But this last stated value was a whopping 40%-plus higher than the purchase price of the THMG – meaning the value of Astoria’s investment increased from $5.5m (around R99m) to $7.9m (R140m). This infers a value of around R560m on THMG.
What can also be garnered from Astoria’s financial report is that the Trans Hex land operations and the Trans Hex marine operations conducted a rights issue to raise an aggregate of $17.6m (around R320m).
Officially, the capital will fund maintenance and expansion capital expenditure – specifically increasing mining capacity, efficiency and the life of some vessels. Clearly Trans Hex was never going to be a bidder for De Beers or even De Beers Marine. But with the diamond market still in a down-cycle, there might also be smaller marine and land operations to pounce on.
Trans Hex will be around – both in its land-based and marine diamonds – to make hay when the sun shines again
Interestingly Astoria did not participate in the rights issue and consequently its share in Trans Hex land and marine has been diluted down to 14%. It would be easy to interpret this as a lack of enthusiasm for Trans Hex’s long-term prospects. That would be wrong, however. Astoria is fully invested in its portfolio, and simply did not have the money to take up the Trans Hex rights.
At Astoria’s recent AGM Van Niekerk openly expressed disappointment at not being able to follow their rights. He intimated Trans Hex remained a stout contender. “We have seen weak diamond prices with a roughly 30% drop. But both Trans Hex’s Angolan and marine divisions are profitable. If you can still make money despite a 30% drop in the diamond price then you have good operators running this business.”
Van Niekerk added: “Trans Hex will be around – both in its land-based and marine diamonds – to make hay when the sun shines again.”
Viljoen raised the issue of possible corporate action when noting that under current conditions not all diamond miners were cash-flow-positive. “This creates opportunities for those miners that are cash-flow-positive and have a flush backer. We remain excited about the long-term market for diamonds.”
Viljoen reckoned the only way Trans Hex could grow was by acquisition. “We (Astoria) will cross that bridge when we get to it. But at the moment we don’t have the cash to support them.”
With Anglo American having to execute on a new portfolio structure, the fate of diamond giant De Beers might have some implications for Trans Hex. For instance, if Anglo opted to spin off De Beers into a separate listing on the London Stock Exchange and JSE would Trans Hex reconsider its unlisted status? A listed De Beers would bring the diamond sector back into prominence on the JSE, perhaps allowing Trans Hex a valuable point of reference … not to mention possible capital raising opportunity.
Relisting a profitable Trans Hex – with a better operational spread across land and sea – might appeal to small cap punters that have not exactly been spoilt for choice for things that glitter in the JSE’s junior mining sector.
