Marine diamond miner may sink

[] — THE West Coast marine diamond industry has over the years proven a dangerous lure for excitable investors.

The truth is that there have not been too many successful investment ventures outside the market leader Debmarine (De Beers Marine). In the fifties and sixties Sam Collins’ successes created an aura of romanticism around the industry and more recently Andre Louw and Ivan Prinsep hit a rich production vein with Ocean Diamond Mining Holdings (ODM). These were the standout independent successes, sparking briefly and brightly.

Trans Hex – which in the late nineties acquired the hapless Benguela Concessions (Benco) still has a meaningful exposure to some shallow water operation in Namaqualand. But the returns from marine operations have not been inspiring by any means.

While the near collapse of Namco and Benco probably snuffed out sentiment for small to medium marine diamond mining ventures, there has been some activity in the sector and even the odd listing of receptive foreign bourses like the Toronto Stock Exchange.

The latest Cape Diamonds plc – which is focusing its activity on the notorious Lester Pipe – recently listed on the AIM market in London with a market capitalisation of £90m (that’s well over R1.2bn!).

Maybe the tide is turning for the marine diamond mining sector again…

Suspiciously hefty returns

In this light I was fascinated to see earlier this year a report on financial website Moneyweb about a company called Wealth 4 U, a marine diamond company which was making promises about some suspiciously hefty returns without even having a prospectus at the ready.

Moneyweb reporter Julius Cobbett expressed sufficient scepticism to put most sensible punters off investing in Wealth 4 U. It also seems the Moneyweb article spooked the prime movers at Wealth 4 U, and the company’s website – which directors later claimed was a test site that inadvertently went live – was closed down.

I, however, managed to send off an e-mail requesting to be mailed a prospectus when such a document was ready.

I wasn’t terribly hopeful about receiving correspondence from Wealth 4 U so it was quite a surprise to find the prospectus lodged in my e-mail in-tray on Friday evening.

And what a fascinating and imaginative document it is too…

It seems Wealth 4 U was established in February (incorporated on April 1) this year as a vehicle to consolidate a number of small boat-based marine diamond mining ventures that holds the rights to a contract mine for Alexkor in its “A” concession area on the Namaqualand coast.

Two offers

The prospectus pitches two offers to prospective investors. The first offers 56m shares at 100c/share, and the second offer proposes a conversion of ordinary shares to cumulative redeemable preferential shares for the “initial” investors in Wealth 4 U’s boat companies.

The preference share offer will see the “initial” investors offered 10 000 cumulative redeemable preferential shares for each share held in the boat companies.

The prospectus states that the first offer will raise capital “for the purposes of permitting the company to fully exploit the mineral rights held by the mining rights company and to enable the company to expand its activities to both the ‘B’ and ‘C’ concession areas”.

The purpose of the second offer is to allow the company to acquire the boat companies, which will become wholly-owned subsidiaries.

The minimum subscription has been set – somewhat ingenuously – at R94m. That means participation by the “initial” investors already means the offer has reached minimum subscription.

There are a couple of things that worry me about the prospectus… things that would probably preclude me investing hard earned bucks in this venture.

No support for company valuation

The prospectus has a surfeit of detail around the diamond mining sector, but a paucity of information of Wealth 4 U’s actual operations.

The financial statements to end April – three months after the company was established and one month after incorporation – reflect nothing that can support a fundamental valuation of the company.

This despite the fact that there are suggestions that Wealth 4 U is already in operation. For instance, the prospectus claims “Alexkor has, with effect from 1 April 2006, marketed all the Wealth 4 U production in the open market”.

Considering that the public is being asked to pitch in R56m of fresh capital one might have thought quarterly production (February to end April) figures should have been published?

An appendix – signed off by auditors GC Cloete & Associates – uses historic production figures to estimate maximum carats mined for a full year at about 49 000 carats. That’s a big production figure from about a dozen small boats, and not far from what ODM (about 20 000 carats a quarter from its large mining vessels) were producing from rich Namibian concessions in its heyday.

Trans Hex does about 50 000 to 70 000 carats from its marine mining activities a year – depending on the level of sampling.

Management depth lacking

GC Cloete & Associates reckons at an average price of $500 per carat and an exchange rate of R6/$ (and if all the boats produce the same production) Wealth 4 U should generate an astounding net profit per year before tax and dividends of R88.8m.

If that is realistic (and I have my doubts) there’s no doubt Trans Hex and other mining aligned institutions would be gunning for a maximum allocation of shares in Wealth 4 U. Somehow I don’t think that will be the case…

Another concern is management depth for this tricky industry. Marine mining is a difficult business, where your production line is really at the mercy of the fickle west Coast weather. The number of production days can be decimated, and the care and maintenance bill can bloat depending on the voracity of west coast storms.

Holding together and building a corporate requires strong management skill too.

The prime mover behind Wealth 4 U is a Louis Liebenberg, whose brief CV looks a tad short on mining and corporate experience.

It reads: “Louis was a very prominent individual in the financial services industry and excelled in both the technical and management roles. At a very young age, he became the branch manager of a very successful financial services outlet for one of the largest insurers in Africa and continuously won various performance prizes.”

Coming at a cost

Bringing these vast skills to Wealth 4 U comes at a cost. Liebenberg will earn an annual salary of R2.4m and also receive directors’ fees of R120 000.

And that’s not all. The corporate ingenuity comes at a cost too. The prospectus states that Liebenberg was responsible for establishing Wealth 4 U, the company and for presenting the entire package of acquisitions to the company. For that he received 30m cumulative redeemable preferential shares in Wealth 4 U.

Exactly how much capital – and I’m talking cash here – Liebenberg has invested in Wealth 4 U is not made clear in the prospectus.

Then there’s the issue of proper disclosure. The vendors of the dozen “mining boats” are not clearly disclosed, save by the listing of corporations that – according to my search on – are shelf companies (Midnight Storm, Masquerade Properties etc).

Ascertaining the identity of the vendors (not to mention the quality of the ‘fleet’) is critical, especially since the boat fleet is supposedly providing a huge value underpin to Wealth 4 U.

I think I’ll pass…