Diamonds are trap for unwary investors

[] — A WHILE ago I came in for some gentle ribbing from a colleague on the publication for which we then worked for writing that after the delisting of De Beers, Trans Hex was just about the only way to invest in diamond mining through the JSE.

I retorted that a statement of fact should never be considered as synonymous with an investment endorsement; the importance of the distinction is underlined by Trans Hex’s latest results for the year to 31 March.

In the first place a pre-tax profit of R105m is struck after writing back R25m impairment of assets made the previous year, whereas in financial year 2006 a pre-tax loss of R128m was incurred after impairment charges of R219m.

Strip out those items, which in the good old days would have been regarded as capital in nature, and you arrive at a pre-tax profit of R70m in the latest year.

In the second place, operating cash flow fell from R232m to R199m. And in the third place, the only available segmental information shows a mining profit of R217m in South Africa, down from R224m in financial year 2006.

Unfortunately, Trans Hex isn’t a company that believes in calculating “core” earnings, a concept that can be abused, but can also be a more accurate reflection of underlying sustainable profits. Nor, strangely, do the bullet points make any reference to dividends.

I’m sure it’s just a coincidence that those were cut from 30c to 20c/share, but I suspect that’s in fact a better indicator of the company’s underlying performance.

Mind you, the market took the figures positively. In the immediate aftermath of their release the share put on 20c to R14.50. Markets are fickle creatures, but I see no logical reason for the share to challenge those higher levels again for a while.

Of course, apart from De Beers, the diamond sector of the JSE has long been a trap for the unwary.

Investors should need no reminding of the travails of Good Hope, which couldn’t even execute a trouble-free purchase of assets from its own controlling shareholders. And I’ve written before of how Afgem was stripped of its tanzanite business, which was replaced by another set of dubious diamond mining properties.

Afgem’s subsequent credibility rested mainly on its enrolment of the well-regarded diamond analyst Rodney Yaldwyn as CEO.

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Well, in March three directors resigned after the share was suspended when, in a strangely worded statement, “the company became aware that information about the difficulties [it] was experiencing in respect of cash constraints had become known to persons beyond the confines of the company’s management”.

And late last month Yaldwyn resigned with immediate effect.

Unless I’ve missed something, that leaves Afgem with only two directors: non-executive deputy chairman Ami Mpungwe, who is presumably now acting chairman, and financial director Michael Summers. Hardly enough for a functioning outfit, but then it’s doubtful how much longer Afgem will merit that description – if, indeed, it still does.