Well Lookie Lookie......Have you read this Bob. Sit down first.
Rex gazes past slow moving exploration
Rex Diamond Mining Corp
RXD
Shares issued 59,018,009
2000-01-18 close $8.9
Wednesday Jan 19 2000
MINOR EXPLORATION, MAJOR PROMOTION
by Will Purcell
Rex Diamond Mining Ltd. has given its shareholders a wild ride over the past
year, and all indications suggest the stock's tumultuous journey is far from over.
The company is slowly exploring its large landholding in Mauritania, while
aggressively touting the merits of the play to investors in Europe. Rex has been
active in Mauritania since early 1997, but has spent only limited funds on
exploration over the past two and one-half years. Nevertheless, Rex has recently
been able to return some encouraging results in the past few months. Last fall, Rex
found four kimberlites in the Tenoumer region of Mauritania, one of which has
subsequently been shown to be at least marginally diamondiferous. The kimberlites
are reportedly large, and the company is also investigating two bodies to
determine if they are in fact one huge kimberlite, although information about
potential diamond content is lacking. In addition to the Mauritanian play, the
company owns three diamond mines in South Africa, and holds a prospective
property in Sierra Leone.
Rex chief financial officer, Ben Holemans, said that the northwest African play was
the company's primary project. He stated, "If you look to Mauritania, we have
more than 100,000 square kilometres, and we have four distinctive diamond areas
which could be diamondiferous kimberlite provinces." He went on to say that the
company was currently working on one of these areas, the Tenoumer licence,
where four kimberlite pipes have already been discovered. In the three remaining
areas, he added that Rex has discovered numerous diamonds, and pyrope
garnets. The indicator garnets were a promising sign, he said, because "some of
them were subangular, or even subkalyphitic, which you need, otherwise you're
not in the neighbourhood in a desert environment." In these remaining areas, Rex
has not yet discovered any kimberlite pipes, but the company hopes the lack of
significant results will soon change. Mr. Holemans said that they now had a
number of anomalies that are prospective kimberlites, based on the company's
aeromagnetic work. "We have the signature at least from the Tenoumer permit,
and we now know approximately what the aeromag signature is of kimberlites in
these regions," he said.
Mr. Holemans said the company had been concentrating recently on the
Tenoumer permit area, as the climate was cooler there during the winter months.
"We have to focus on that area because in summer it gets hot, and it becomes a
bit more difficult to explore there." He added that the other regions are very close
to Zouerat, a city of 40,000 in the centre of Rex's lease, which the company uses
as a base to explore the other areas.
Rex spent approximately $900,000 in Mauritania in the year ended March 31,
1998, and that amount increased marginally to $1.13-million (U.S.) the following
year. In the six-month period to the end of September, 1999, the company spent
a further $800,000 (U.S.). Mr. Holemans said that Rex is now spending a base
amount of about $100,000 (U.S.) per month in Mauritania, and he stated that
additional work, including aeromagnetic surveys, were an additional expenditure,
and this work would only be undertaken when warranted. He added that the
company had conducted some finer resolution aeromag work on a 200-metre line
spacing, which typically cost in the neighbourhood of $250,000 (U.S.). Drilling
costs are also not included, and the company estimates a charge of $100 (U.S.) to
$150 (U.S.) per metre. A 400-metre core hole would typically cost $40,000
(U.S.), Mr. Holemans stated.
While the first kimberlites were found with a minimal expenditure, further finds
should require a greater cash outlay. Mr. Holemans said that the first four
kimberlites were easy to find, as they all had surface outcrops. Late last year, as
the company's stock climbed, Rex analyzed kimberlite samples collected from the
surface of two of these pipes. One of the bodies was reportedly diamondiferous,
while the other was barren. Mr. Holemans said he could not say how many
diamonds were recovered, but he added that the result was not particularly
relevant, as the kimberlite was collected from surface grab samples. He said that
the most important result of the analysis was that it represented the first
diamondiferous kimberlite found in Mauritania. The company's followers in
Europe were thrilled.
It appears that Rex itself might not be a big believer in the prospects of the
previously announced kimberlite finds. The four pipes discovered to date, Mr.
Holemans said, were just on the edge of the craton. He added, "The more you go
to the west, the more diamondiferous the kimberlites will be. That's the reason we
drill all the kimberlites in that area." Another reason appears to be that the
remaining targets do not outcrop on surface, but are buried under a layer of sand
or overburden. As a result, the current program appears to be centred on drilling
additional targets in the area.
Earlier last year, Rex brought a jig plant from its South African operation to test a
near-surface gravel layer on their Touajil permit area. The company had
previously found 16 macrodiamonds in the area, and conducted a ground
magnetic and electromagnetic survey over a promising portion of the property.
The plant arrived during the spring, but little more was heard of it. Mr. Holemans
confirmed that the plant was now indeed in the Touajil area. He said the plant was
operated for a time last summer, but he stated, "We thought we found some
diamonds in the gravels, but it wasn't really worthwhile at that time to work further
with it." While probing the Touajil gravel layer may not have panned out, Rex still
calls the Touajil property promising.
The company also completed a brief exploration program on the Cheggat permit
area, which lies in the far east of Mauritania, between Mali and Algeria. Mr.
Holemans said: "We completed a one-month program in Cheggat, a small lease.
We covered it totally; it took us one month to work on it with three teams working
there. We now have all the samples taken and they will be sent, probably later this
month, to South Africa to be analyzed. It's a small little nucleus of a craton which
is there."
Mr. Holemans said that it might be hard for investors to keep track of Rex's
Mauritanian play. He stated: "We work today with more than 50 people, and
because it is such a big area with so many different things to do, we really have to
play around with all the people to put them in the right places which are important
at that point of time. Sometimes it is a bit confusing because we change around
people, and I can understand sometimes people are a bit confused." With so much
work to do, and such a high stock price to support, Rex appears oddly committed
to its slow pace of exploration. Mr. Holemans said, "What we could do of course,
is instead of 50 people, we take 100 people, but of course then you have to
organize it." He acknowledged the company was proceeding at a rather slow
pace, but he said the company was slowly expanding its program. "We just
ordered two new trucks, so we are slowly increasing," he added.
Happily, getting those two new trucks to the site is no problem. Mr. Holemans
said that the logistics to supply the program were fairly simple. "Antwerp is one of
the biggest harbours in all of Europe," he said, adding, "It's almost like a centre for
west Africa. Every week you have two ships going to Nouadhibou, so the
transportation costs are very limited." From Nouadhibou, a port on the
northwestern coast of Mauritania, a railroad runs to Zouerat.
Gazing into the distant future, Mr. Holemans was equally hopeful that the costs to
develop a potential mine would also be quite reasonable. Of the potential cost of a
hypothetical mine, he stated, "It's difficult to say, but if you compare it with the
North American mines, probably it would be less." The only potential problem he
foresaw in this backwater of the world was that of an adequate water supply. The
company has been exploring for water as well as diamonds over the past two
years, and apparently a pleasing gusher is readily available. Mr. Holemans said
that only four bore holes tapped into an underground water supply would supply
enough water for a large mine, and he added that underground pressure would be
sufficient to deliver the water.
Leaping ahead several years, Mr. Holemans estimated a typical diamond mine
would cost between $300-million (U.S.) and $500-million (U.S.), depending on
conditions and size. He stated that his hypothetical mine could be constructed
"almost off the shelf," and the actual work could be contracted out. He added,
"We have some experience in South Africa with some suppliers, it's relatively
easy, it's not rocket science." A more complex issue, over and above finding a
mine, appears to be whether Rex would attempt to proceed alone, should the
exploration program ever find a mine. "It's a tricky question," acknowledged Mr.
Holemans, warming to the opportunity to discuss his undiscovered mine. He
stated that an affirmative answer would beg the question of where the financing
would come from, while a negative response would raise the issue of who a
prospective partner would be. He said: "We take it in a very pragmatic way. We
intend to try to do it ourselves."
Mr. Holemans said that a feasibility study would cost about $10-million (U.S.),
and would be a key aspect of a successful program. He stated, "I come from a
banking environment and I know that it would not be too difficult to raise funds
with a good external feasibility study." Mr. Holemans, in addition to being a natural
stock tout, has a banking background, ultimately working in the corporate banking
field with Chase Belgium and Deutsche Bank over the past several years. While
the stated cost for a feasibility study is very low, Mr. Holemans said it did not
include the cost of exploration or bulk sampling. He added, "The problem in
North America is with all the environmental problems, where they had to count the
fish, where they had to pull out a whole lake before they really could make a
feasibility study, and all those kinds of things we do not have in a desert
environment."
While the slow moving grassroots exploration program in Mauritania is now the
promotional favourite, Rex has a number of additional properties. The company
owns three diamond mines in South Africa, but all are losers. The Rex mine is now
shut down on care and maintenance, and the Bellsbank and Loxton operations
continue to lose money. Mr. Holemans said the company was continuing its efforts
to improve the operations. He defined "cash burn" as the difference between the
money sent from Rex to the operations, minus revenues from diamond sales, and
he stated that this cash burn was now running around $100,000 (U.S.) per month.
"On a yearly basis, they're still burning cash, including investments." he said. Mr.
Holemans held out hope that the operations would ultimately generate a positive
cash flow, but he said, "It's limited, it will always be marginal. That's something we
have to face, it's reality."
Rex's original exploration play was in that well known basket case, Sierra Leone.
The company owns a very narrow, but high-grade dyke with promising
economics. Rex has estimated the dyke holds diamonds with a total value of
$3.3-billion (U.S.), but most of the deposit has been extrapolated rather than
drilled. The company was about to proceed with the required exploration to
further prove the deposit, when a coup took place in May, 1997. The company
wisely vamoosed, and no work has been undertaken in the past two years.
Nevertheless, Rex has been the recipient of some unfavourable press in recent
months because of a limited role in the continuing Sierra Leone conflict. Mr.
Holemans said that the recent flurry of reports circulating in the Canadian press
were "old news", adding that the company had originally responded to the same
allegations last fall when they appeared in the Belgian press. He added, "The
Canadian press was inspired by a non governmental organization in Belgium,
which created a negative spin on one small little item, which was the delivering of
helicopter parts to the government. I know that non-governmental organizations
do lots of good things in Africa, but for fundraising they have to show the world all
the things which are bad. What they do not show is all of the positive things that
are happening in Africa."
Rex has been forced to go to the market several times in the past few years to
raise the funds required to sustain its operations, through a series of private
placements, almost solely to European investors. Mr. Holemans said that the
company's cash position was fairly healthy at the current time. He said that Rex
had warrants and options outstanding that were currently well in the money, and
all but one of the warrant series were slated to expire this year. If all the warrants
and options were to be exercised, the company would add another $30-million to
its coffers, Mr. Holemans stated. Nevertheless, he went on to say that it was
conceivable the company would need a considerable amount of cash in the future,
and he conceded that an additional private placement was possible. "If you do one
bankable feasibility study, it's $10-million (U.S.), and if you do four or five others,
you basically need $50-million (U.S.) in cash. We would say, if the time is right,
why wouldn't you do a private placement if the price was right?"
If the exploration results were ever such that Rex required no less than five
bankable feasibility studies, there is no doubt that investors and bankers might be
interested. Mr. Holemans claims he is receiving many calls from potential investors
inquiring about future private placements. Those calls are clearly tribute to an
impressive European promotion campaign that saw Rex shares experience a
25-fold increase in value in a year and one-half, with not so much as a diamond
count from its exploration program. Europeans, largely in Belgium, hold the vast
majority of Rex shares, and the company's chief executive officer, Serge Muller,
owns an estimated 31 per cent of the outstanding shares and he has repeatedly
stated he intends to increase his ownership to 40 per cent.
Perhaps typical of the style of promotion, Mr. Muller was quoted last fall by The
Wall Street Transcript as saying, "Today, we have the certainty that in the very
near future Rex will end up having three important diamond mines in Mauritania."
Other comments have similarly taken forward-looking statements to new heights.
Mr. Holemans acknowledged that there was no certainty that Rex's Mauritanian
effort would pay off, but he nevertheless maintained his personal belief that it
would. He explained that Rex geologist and director, Dr. Luc Rombouts, was a
very good geologist, and a real expert. "The other thing we have is the centre of a
craton, an area that is very prospective. At the same time, we have all the strong
indications that we have subkalyphitic garnets, all the minerals you need." He
added that the indicator minerals all pointed to prospective areas smaller than 100
square kilometres. "So, I expect this year, that in those other three areas, we will
also find kimberlite. It's just a matter of time. At this point of time, you could look
forward. If we discover something, then it will probably be huge. If the grades are
fine, then it will be a major discovery. You cannot say for sure, of course not, it's
exploration. If you know it today, the share price would not be at $7." It's a
frequent refrain, echoed by Rex and its supporters. The aeromag targets are large,
and so too are the recently discovered kimberlites. If one of the large kimberlites
indeed is diamondiferous, and if a bulk sample program reveals grade and value of
economic proportions, then the company would indeed have a major discovery.
In the absence of hard data however, shareholders must operate on faith alone.
The Rex faith machine has shown no signs of slowing down. Rex shares peaked in
early 1997 at $5.35, but the coup in Sierra Leone and the downturn in the
resource sector pared the share price to as low as 62 cents in the summer of
1998. Last year saw a near steady appreciation of value, however, and a
year-end buying frenzy took Rex to an all time high of $15.20 early this month. A
sharp six-day correction pared away much of the gains, and Rex traded down to
as low as $5 to end last week, before rebounding strongly Monday.
The Rex share price is a testament to the promotion campaign undertaken by the
company, which has not yet reported a diamond count from any Mauritanian drill
core samples. With approximately 70 million shares outstanding, including those
soon to be exercised warrants and options, Rex recently had a market
capitalization of just under $1-billion, and the company is currently valued by the
market at about $600-million, on a fully diluted basis. By comparison, Dia Met
Minerals owns 29 per cent of the Ekati mine, and its share of revenues from Ekati
were $37-million for the past three months alone. Dia Met, with just over 30
million shares outstanding, has a market capitalization of $600-million. Mountain
Province Mining owns a 36-per-cent stake in the Kennady Lake joint venture
with Monopros Ltd. Mountain Province is currently valued by the market at a
mere $94-million. Aber Resources owns 40 per cent of the Diavik project, which
is now in the midst of the final approval process. The market currently values Aber
at $500-million.
The apparent disparity in market value has left industry analysts puzzled, although
few have commented publicly. Canaccord Capital's David James recently
reaffirmed a sell rating and suggested a twelve-month target of $1, however Rex's
more vocal cheerleaders gleefully point out that Mr. James has been equally
bearish on Rex throughout its yearlong ascent. While the market volatility has
certainly been a hot topic with investors, analysts, and the media alike, Mr.
Holemans seemed to take it all in stride. He said, "What people have to
understand is this, that the play is something that is in the long term, and that will
turn out to be something huge. That's my personal thinking about it. The whole
upturn and downturn of the stock price, maybe in four or five months we will laugh
at it, and say this was the biggest buying opportunity ever."
Whatever the future holds for Rex and its shareholders in the longer term, the
Mauritanian exploration program is likely to supply many more thrills and spills
along the way. Dia Met and Ashton Mining are also exploring the Mauritanian
sands in a joint venture, and the region does seem to hold good promise. The Rex
exploration program has been proceeding at a much slower pace than its
promotion machine, and at the current pace it could take years to completely
explore the properties. They may not have that long however, as investors may
become impatient if the promised fantastic results do not soon materialize.
Nevertheless, Mr. Holemans said that the company would continue the program in
a pragmatic fashion. He stated that work would only be done if it was the right
time for it, and he added that nobody, not even the market, would force the
company to be diverted from its operational objectives. Mr. Holemans went on to
say, "We will work in the way we worked before, and if the market doesn't
accept it, let them sell the stock." The market was clearly not in a selling mood
today, at least, as Rex moved up another 70 cents Tuesday, to close at $8.90 on
the day.
(c) Copyright 2000 Canjex Publishing Ltd. canada-stockwatch.com
fIXER.......Bob.....Try Decafe. |
