SouthernEra battles wobbly stock
SouthernEra Resources Limited SUF
Shares issued 26,885,895 Sep 23 close $3.01
Fri 24 Sept 99 Street Wire
SOUTHERNERA STICKS TO ITS PLANS
by Will Purcell
SouthernEra Resources Ltd. recently announced that a normal course issuer
bid for the purchase of up to 5 per cent of the company's outstanding
shares had commenced. The purchases will be made over a one-year period,
ending Sept. 9, 2000. The company believes that the depressed company share
price makes the investment a worthwhile use of SouthernEra funds. The move
is the latest step taken by SouthernEra to combat a steep decline in the
company's stock, which reached an all-time high of $20.80 in early October
of 1997. The fallout resulting from the loss of 60 per cent of the
lucrative Marsfontein property saw the share price cut back to $4.55 by
June of 1998, but the stock then rallied to reach $9.10 by early January of
this year. Since that time, a steady decline has taken the share price
markedly lower, reaching $2.70 in mid-August and prompting action by the
company. SouthernEra president, Chris Jennings responded to the decline by
issuing a statement advising that SouthernEra's fundamentals were solid,
and that the company was unaware of any reasons for the drop in value. The
announcement, and the normal course issuer bid have had a supportive
effect, as SouthernEra shares continue to trade near $3.
The low market value is as perplexing to some SouthernEra shareholders --
especially those who have not sold -- as it is to Mr. Jennings. The company
has reported positive cash flow of nearly $19-million for the first six
months of this year, and net income of nearly $10-million, before
exploration writeoffs. The company certainly has had a banner year over the
past four quarters, with almost $22-million in net income, and cash flow of
nearly $50-million, or $1.70 per share.
As the sellers have apparently divined, these results are not sustainable,
as the rich layers of the producing M1 property are being mined out and
replaced by lower grade material. Kim Freeman, SouthernEra vice president
in charge of operations, said that he expected the M1 results to continue
at current levels for the remainder of this year, but to decline in 2000.
Mr. Freeman said that 1998 cash flow was $1.30 per share, and the 1999
estimate was $1.48 per share. He estimated that the cash flow from
operations would decline in 2000 to a much more modest 51 cents per share,
as the pure kimberlite is exhausted at M1, and lower grade gravels are
processed. Mr. Freeman said that mining of the pure kimberlite should
continue until August 2000, and processing of the gravel stockpiles would
continue until approximately August of 2001.
The joint venture continues to explore the entire Marsfontein property for
additional deposits. A total of fourteen targets had previously been
identified on Marsfontein, and the company has now provided an update of
the exploration program. A total of 11 of these targets have been drilled,
and kimberlite has been found in eight of them. The most promising news
suggested that the M8 target represents a possible extension of the Leopard
fissure onto the Marsfontein property. The M8 fissure has been drilled for
nearly two kilometres along strike, and inferred for an additional 2.5
kilometres to the property boundary. No estimates of grade have been
released, however the joint venture currently suggests it may be equivalent
to that of Leopard. If so, a hypothetical mine might produce 140,000 carats
annually for in excess of 15 years, presumably with the same revenues and
costs experienced at Leopard. If so, such an operation might be expected to
add five to 10 cents per share to SouthernEra's cash flow. Intriguing
results were also obtained at the M3 and M14 targets, which will also prove
worthy of additional work. The joint venture will continue its exploration
program, and there are tentative plans to underground bulk sample the M8
fissure.
For the longer term, SouthernEra is depending on the 100 per cent owned
Leopard fissure system on its Klipspringer property in South Africa.
Development of the Ingwe, or eastern portion of the fissure is well under
way, and has begun on the western, or Ndau section. Mr. Jennings said that
the fissure runs right across the property, and development currently
consists of six operating stopes. This will be expanded steadily, and he
estimated that by March of 2000, the project would be processing 20,000
tonnes of kimberlite monthly. At this rate, annual production from the
Leopard fissure should reach 120,000 carats per year. With a kimberlite
resource of nearly five million tonnes, Klipspringer will be a long term
producer for the company. Mr. Jennings estimated that once higher
production levels are achieved, net revenues to the company from Leopard
would average $50 (U.S.) per tonne, and operating costs should be reduced
to about $25 (U.S.) per tonne. He said that these costs included general
and administration charges, as well as further development costs. If these
projections are met, Leopard could provide an annual cash flow of
$5-million or more. Mr. Freeman stated that the contribution from Leopard
would amount to approximately 40 per cent of the forecast 2000 cash flow,
or about 20 cents per share.
SouthernEra continues to pursue its plan to diversify its interests. The
company announced its intention to acquire a 54-per-cent stake in Messina
Ltd., which holds a 100-per-cent interest in Messina Platinum Mines Ltd.,
for $10.5-million (U.S.). The $1-million prefeasibility study outlined
reserves of 51 million tonnes containing nearly 11 million ounces of
platinum group elements and gold. The study estimated an initial annual
production of 120,000 oz of platinum group metals and gold, 1,400 tonnes of
nickel, 850 tonnes of copper, and 27 tonnes of cobalt. The prefeasibility
study indicated that after tax net income of $23-million was likely. The
study was conducted at a time when base metals prices were near their lows,
and the recent recovery from these levels will further enhance the project.
Mr. Freeman said that the study assumed a price of $4,000 (U.S.) per tonne
of nickel, and recent prices have been in excess of $6,500 (U.S.) per
tonne. The study also used a platinum price of $400 (U.S.) for platinum,
and $280 (U.S.) for palladium. While the platinum price is now lower, the
difference should be largely offset by an increase in palladium. The
current prices are near $370 (U.S.) per ounce for platinum, and $356 (U.S.)
per ounce for palladium.
Mr. Jennings said that, "The feasibility study is due to be finished by
mid-November", and he stated that SouthernEra did expect to exercise its
option. The work undertaken since the earlier study has examined the mining
methods to be used, and the earlier target of 60,000 tonnes per month has
been increased to 80,000. As a result, 161,000 ounces of platinum group
metals should be produced annually. A corresponding 33-per-cent increase in
base metal production appears likely as well. This increase in rates of
production, combined with higher metals prices, could significantly enhance
the profitability of the project. At recent prices, the ore appears to have
a value of approximately $75 (U.S.) per tonne.
After the acquisition is completed, an offer will be made to the minority
shareholders, at the same terms as offered to Messina Holdings. SouthernEra
believes that a considerable portion of the minority holdings will be
offered, and estimates that the company's final interest in Messina
Platinum will approach 70 per cent. Mr. Freeman said that from 10 to 15 per
cent of Messina would be held by a black empowerment group, and the
remaining share would continue to be held by some of the minority
shareholders. SouthernEra currently plans to finance much of the project
through debt financing with a syndicate of banks rather than through a
large equity issue, although a rights offering on the Johannesburg Stock
Exchange is possible.
Work is also progressing at the company's 51 per cent owned Camafuca pipe
in Angola. Reputedly the world's largest undeveloped kimberlite, the pipe
has been minibulk tested and portions of the body show an interesting
grade. The most recent result suggested a grade of 0.43 carats per tonne
for the higher grade epiclastic kimberlite grit material, which represented
a significant improvement over earlier results. A far larger bulk sample
program will extract 25,000 tonnes, and should be completed before the end
of the year. SouthernEra was sufficiently encouraged by the earlier results
to complete the deal to acquire its interest, making a $5-million cash
payment, and issuing 880,750 shares to the vendor, Sphere Trading Group of
South Africa.
Across the Atlantic, the company pursues diamonds in Brazil, on its joint
venture with Canabrava Diamond Corp. A sampling program has been
undertaken, and the previous targets are being re-examined, as the company
believes some of these targets may have been improperly tested. In
addition, the company has recruited an alluvial diamond expert, and will be
aggressively searching for alluvial diamond deposits. The company hopes to
generate cash flow from the alluvial program, and would use the proceeds to
continue the search for kimberlite pipes. SouthernEra officials said the
possibility "would be a nice objective."
To date, no economic primary sources have been found in Brazil, in spite of
the large quantities of alluvial diamonds recovered over several hundred
years. That situation may be coming to an end however. De Beers is
apparently taking a bulk sample on a kimberlite body about 40 kilometres to
the south of the SouthernEra ground, and it appears to be a medium grade,
high value body with economic potential. SouthernEra's primary thrust in
Brazil appears to be the pursuit of alluvial diamonds, and the company is
constructing a small processing plant, capable of processing a number of 50
to 500-tonne samples. While the joint venture agreement appears to limit
spending on alluvials to 20 per cent, Mr. Jennings said that it was likely
that their partner would agree to a greater amount if it appeared to be a
profitable move.
The company also has extensive land holdings in Canada's Northwest
Territories. To date, the region has not been kind to SouthernEra's
exploration efforts, however. The Back Lake joint venture continues
exploration at Munn Lake, but currently without the financial participation
of SouthernEra. The estimated $750,000 program continues to explore the
kimberlite sill discovered early this year. The main thrust of the current
campaign consists of a 10 to 15-hole drill program to define the strike and
down-dip continuity of the kimberlite sill, and to determine its thickness
on both the northern and southern shores. Upon completion of this work,
SouthernEra's interest would be diluted to 60 per cent, down from the
current 70 per cent mark. As well, the company appears to have withdrawn
completely from the MacKay Lake program, having written down its $3-million
investment with the statement that it plans no further work on the property
in the near future.
SouthernEra remains hopeful on its other Canadian projects. Mr. Jennings
continues to believe in the potential of the Yamba Lake property. An
airborne survey has been completed, and a number of pipe-like targets have
been identified, and a number of mineral trains have been located. Mr.
Freeman stated that a "pretty major drill program" was in the works for
this coming winter, and said that he did "think that we will find
diamondiferous kimberlite pipes."
In addition to its 51-per-cent share of Yamba, SouthernEra has a
40-per-cent interest in the EG-05 pipe on the Lac de Gras block.
Preliminary microdiamond recovery revealed 27 microdiamonds and one
macrodiamond from a total of 129.4 kilograms of kimberlite. A further 600
kilograms had been recovered and submitted for diamond recovery. Mr.
Freeman said that roughly eight diamonds were recovered per 10 kilograms,
including macrodiamonds. The results were apparently sufficiently
encouraging to warrant a further look this winter season, and more drilling
is planned. As well, a kimberlite dyke system has been identified on the
DHK property, in which the company holds a 25-per-cent stake. Seven
kilograms of kimberlite from the DD2002 body was found to contain six
microdiamonds, over a true width of 2.1 metres. Mr. Freeman said that dykes
had commanded more respect since the discovery of the Snap Lake dyke by
Winspear Resources. It appears likely that followup work will be undertaken
on this discovery over the next year.
SouthernEra appears to have reached its long stated goal of achieving early
cash flows in South Africa, and using the proceeds to finance aggressive
exploration programs elsewhere. The main tasks at hand are increasing
production and reducing costs at Leopard, and rapidly advancing the Messina
project. The company should have an ample, although decreasing flow of cash
until late next year, when the ore from M1 is largely depleted. Based on
the numbers contained in the prefeasibility report, the Messina project
should ultimately replace the lost cash stream from M1, and allow
SouthernEra to remain a highly profitable operation. Additional discoveries
on its far flung holdings would further add to the profitability of
SouthernEra.
SouthernEra shares retreated below $3 this week, despite the company's
share buyback plan. The stock rallied in intraday trading on Tuesday to
$3.40, following the exploration update from Marsfontein.
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