[miningmx.com] — CLIFFORD Elphick, the CEO of Gem Diamonds, is talking about expansion again following a difficult period for the firm. But the feeling is that this time he has to make his acquisitions and growth plans count for more.
According to one diamond analyst recently, Gem could be deemed a bit of a failure. That’s because it had raised $107m in 2009 and issued $550m in shares at listing in 2007 which it used hurriedly to buy assets as far apart as the Central African Republic and Indonesia.
But what did shareholders get in return?
You could have sold your Gem shares at £11.72/share in May 2008 before it slid to as low as £1.25/share a year later, but otherwise there’s little to show for the capital raised.
Most of Gem’s acqusitions are in mothballs and/or are up for sale. Only Letseng, Elphick’s first inspired acquisition and Ellendale, in Australia, really remain. You can’t really say Gem is much farther on as a company than when it first listed.
And there could be worse to come.
Letseng’s erstwhile manager, Keith Whitelock, has left the company amid several other resignations suggesting it has lost its early lustre. Without Whitelock, who I’m told made running Letseng a life’s mission, there’s questions the mine will run as well. Were that the case, an important cog in Gem’s cash flow would falter.
Nonetheless, Gem is cashed up, debt free and with a share price at £2.50/share, there are signs shareholders are prepared to stand by Elphick who, in turn, is preparing to make another run at growing the company.
Interestingly, he’s talking in more cautious terms.
In an interview with my colleague, Allan Seccombe, Elphick said Gem was looking at building internal projects; that is, assets already in Gem’s thrall, as it were. He made a nod towards the merger and acquisition market – “we’re talking to everyone’ – but even this was couched in caution.
“We’re still looking out there although these could perhaps be partnerships where there’s a need for capital or management expertise which we can give,’ he said.
Elphick has always been a frank personality. So I’m not surprised by his candid admission that neither the Indonesian mine Gem bought, Cemphaka, “didn’t cut the mustard’, an idiom he also applied to the exploration ground in the Central African Republic which Gem relinquished.
Elphick says the company could develop Gope, a mine in Botswana bought from De Beers and Xstrata, or even Chiri, in Angola. But the diamond market won’t support financing for these developments just yet, he added.
So what of the diamond market?
According to De Beers, the first two sights of the year were worth about $1.2bn with price increases of 10% secured in each of the first two events.
There are concerns, however, that the main driver of price recovery through the second half of last year was an artificial shortage of rough diamonds. This, according to a report by BMO, is owing to production cuts from De Beers and Rio Tinto, as well as Alrosa which markets through Gokhran, the Russian state precious metals and gemstone depository.
“Prices of polished gems are expected to remain steady or even continue to improve as demand for diamond jewellery recovers in line with a recovering global economy, albeit at a slower rate than in 2009,’ says BMO.
This will be supportive to Gem, as to all other diamond players, which it should be remembered still managed a profit in its 2009 financial year, even as De Beers sank into loss. But one can’t help shake the feeling that 2010 and 2011 is a question of stand and deliver for Elphick.
BHP Billiton
No matter how I look at it, South Africa is net loser of the Eskom/BHP Billiton smelter controversy. This is the question of just how little Billiton pays for power supplied by Eskom to its Hillside and Mozal smelter in Richards Bay and Mozambique respectively.
The suspicion at Sake24, the newspaper that is taking Eskom to court over its reluctance to provide the contract details, is that Billiton is paying less than cost to Eskom.
Of the R9.5bn in lossmaking embedded derivatives reported by Eskom last year, a huge portion (if not all) could be comprised of future losses on the remainder of the BHP Billiton electricity supply contracts.
This is terribly bad for South Africa. Taxpayers are taking the hit for margin BHP Billiton ships predominantly offshore; in other words, South African citizens are indirectly padding the pockets of shareholders in Europe and North America.
But the flipside is that in forcing BHP Billiton to renegotiate electricity contracts, South Africa supports the widespread fear that it’s a country with an untrustworthy regulatory environment. It’s a dilemma for Eskom which has already been told by public enteprises minister Barbara Hogan that a revisit of the contract terms is a must.
There’s one innovative solution which I can’t really vouch for, but in urgent consequences has a certain cache.
Why not have government or Eskom buy BHP Billiton out of its Eskom contract? That could equal the cost of building a new power station without the long lead time and cost escalation. BHP Billiton’s smelters consume nearly 3,000 megawatts, equal to the demand produced by Cape Town and Durban.
