Author: WillP -- Date:2000-03-22 11:49:53
Subject: Street Wire
A NEW ERA FOR SOUTHERNERA
by Will Purcell
The new president of SouthernEra Resources has
already announced changes to the company's head office
but other changes may alter the company's asset base
and direction over the months ahead. The reorganization
began last week with the announcement the company
would be moving from Toronto to Denver and a shuffle
of vice-presidents. In are Eric Kinneberg and John
Pearson, out are Frank van de Water and Kim Freeman,
and promoted is Howard Bird. The new arrivals are a
known quantity to Mr. Banning as they have worked
together in recent years. Mr. Kinneberg in particular
seems to follow Mr. Banning wherever he goes. After
years together at the ill-fated Pegasus Gold, the pair also
met up again for a time at Golden Queen Mining Co.
Ltd.
Mr. Banning and his new regime hope to restore
credibility among industry analysts and investors for a
company that has come to be less than affectionately
dubbed SouthernError due to a constantly changing
focus and hopeful predictions that often fell flat on their
face. It could prove to be a formidable and
time-consuming task, given its new focus on platinum
and a new head office. Mr. Banning said that the
directors had a tendency to micromanage the company,
with everyone going in different directions and doing
their own thing, publicly acknowledging what analysts
have been saying privately for some time. The company
presents the moves as a fresh start but market continues
to be highly skeptical . In typical fashion, SouthernEra
gained 20 cents following the news but promptly
dropped 30 cents the next session.
Most of the changes reflect a continued change in the
company's primary focus although Mr. Banning said that
diamonds would remain a key part of the company and
he was of course careful to heap praise on the members
of the old cadre of diamond explorers who would be
staying. That group includes Lee Barker, who will
continue to be responsible for Angolan operations, but
little else, and Howard Bird, who now seems responsible
for nearly everything else, in a greatly expanded role.
By moving offices, the company hopes to woo U.S.
retail and institutional investors because he believes that
platinum is far better understood in Denver and the
United States in general. According to Mr. Banning's
grand scheme, the first priority will be to meet the U.S.
Securities Exchange Commission's requirements to
obtain a secondary listing on a yet to be determined
American exchange, followed quickly by an equity
financing deal, all of which he hopes to accomplish in a
remarkable three or four months. Mr. Banning said he
would like to combine the financing with an exchange
listing and "hit the promotion trail really hard" about
three weeks before any such deal.
Mr. Banning describes today's SouthernEra as primarily
a platinum company, thanks to the acquisition of a
54-per-cent stake in Messina Holdings Ltd. The current
plan indicates a mining rate of about 2,850 tonnes per
day and forecasts annual production of about 160,000
ounces of platinum group elements and gold. In
addition, annual production of about 2,500 tonnes of
nickel is anticipated with copper credits as well. The
project has an internal rate of return of 36 per cent,
using metal prices that are about 25 per cent less than
current levels. With operating costs estimated to be $150
(U.S.) per ounce, the economics of Messina are
thankfully better than what Mr. Banning had been
working with at either Golden Queen or Pegasus.
The feasibility study was completed on a small fraction
of the total resource, and future expansion seems
probable, especially at current metal price levels. Mr.
Banning said that a doubling or even a tripling of the
production rate was likely, at some point, financed out
of future cash flow. The deposit currently hosts an
estimated 10 million ounces of platinum group elements
and an annual production of 500,000 ounces would still
imply a 20-year mine life. With such an increase in
production, Messina should be able to do its own
smelting and refining for more profit. The feasibility
study projected an annual cash flow of about
$50-million.
One of Mr. Banning's first herculean tasks will be to
actually arrange financing for Messina's projected
$86-million (U.S.) capital cost. The company is
discussing the matter with Rand Merchant Bank on the
basis of a 70-per-cent debt financing but one of the
major stumbling blocks appears to be reluctance on
Rand's part to give credit for work previously
completed. If no such credit is given, additional funds
will definitely be required, in addition to the $10-million
(U.S.) currently in Messina's coffers. Any such financing
would be completed by Messina itself but SouthernEra
would also require its own equity financing to maintain
its share of Messina. Mr. Banning appears to be leaning
towards a rights issue for Messina as it would give
SouthernEra the opportunity to increase its holding,
should not all Messina shareholders participate.
SouthernEra hopes to complete the financing within six
months, which would imply that Messina would be a
significant source of cash for the company by the spring
of 2003 and perhaps sooner. SouthernEra shares
doubled from a January low to reach $3.55 in
mid-February, in anticipation of the Messina deal
closing. When the good news announcement finally
came, it sparked a five-day market slump that carried the
stock from $3.25 back to $2.20. Mr. Banning attributed
the drop to a general lack of confidence in the company
and the market expectation that the financing for
Messina would also be announced at that time.
It is far from all good news, as the company now
critically reviews its far-flung diamond projects, some of
which have long been touted as the company's future.
The announcement of the deal to acquire an interest in
the Camafuca diamond project aroused little enthusiasm
in 1997 and two years later, the market did not
favourably receive the news that the deal had closed.
That news, and a few other potentially costly grassroots
exploration plays, contributed to a steady drop in
SouthernEra shares through 1999, before the stock
bottomed at $1.55 this January.
The merits of the Angolan Camafuca project have been
a subject of considerable debate among investors and
analysts alike in recent times, primarily due to the large
amount of cash that the play has siphoned from the
company coffers. That debate now seems to have spread
to within the company itself. SouthernEra has now spent
nearly $30-million in acquiring an interest in the project
and advancing it to prefeasibility and Mr. Banning now
states that the company no longer wants to risk its
money in Angola -- still one of the world's most
dangerous countries. As a result, SouthernEra now
hopes to attract a suitable partner willing to finance the
next round of development and acquire an interest in the
prospect.
SouthernEra currently holds a 65-per-cent stake in
Camafuca, which is also subject to a 14-per-cent net
profits royalty. The company will complete the
prefeasibility study on its own, which will be in
sufficient detail to evaluate the merits of proceeding but
insufficient to obtain financing. Meanwhile, Mr.
Banning said that the company was talking to a potential
joint venture partner and also to a possible source of
financing but was proceeding very carefully. The capital
costs for the first phase of development are estimated to
be about $10-million, an amount that SouthernEra hopes
to entice another company to finance. A potential
expansion would cost a further $16-million which
would then be paid for from cash flows.
Camafuca presents an intriguing dilemma. The grade of
the 160-hectare kimberlite varies from perhaps as high
as 0.35 carats per tonne, down to zero. The higher-grade
area accounts for about 10 per cent of the surface area
and the economics could be fairly healthy if the
company's low-cost dredging and processing operation
pans out. If the grade across 75 million tonnes indeed
averages close to 0.30 carats per tonne, the kimberlite
itself could carry a value close to $40 (U.S.) per tonne.
Mr. Banning said that the prefeasibility study was close
to completion and the numbers looked good. While the
numbers may be attractive, its location certainly is not
and Mr. Banning conceded that the more robust the
numbers, the greater the chance of losing the project to
an Angolan company, adding, "It's just a nasty place to
do business." In addition to the obvious security
problems caused by the civil war, financed in part by the
theft of diamonds, Mr. Banning said: "To get anything
done, you've got to know somebody and grease the
skids. It's not a good way to do business, because the
more you give them, the more they want." That
conclusion may have arrived three years and $30-million
too late.
Further south, the company continues to struggle with
the Klipspringer Leopard fissure. Preliminary mining
has yielded disappointing results to date from an
operation that was supposed to generate a significant
cash flow once the M-1 pipe was mined out. Recent
company estimates suggested that the fissure held as
much as five million tonnes of kimberlite with an
average grade of 0.7 carats per tonne but Mr. Banning
said, "I don't think it's all going to be ore." The company
has now abandoned its operations in the upper portion
of the fissure, due to the excessive dilution that made it a
losing proposition and current indications are that the
economic sections may hold about two million carats,
just over half of earlier projections. The project appears
to have been rushed to production before some
important tests and evaluations were completed. Mr.
Banning confirmed this, saying that more test mining
was needed, as well as work to determine how wide the
fissure must be to yield economic results.
As a result, the feasibility study on Leopard is not
expected to be ready until July, at which time the
company will determine if the project has sufficient
economic merit to justify the capital expenditure
required to mine the deeper levels. Mr. Banning said, "I
personally think it's going to be economic," and he
hoped that within a year after that decision was made,
Leopard would be producing from 120,000 to 180,000
carats per year. SouthernEra is now more realistically
striving to achieve an effective mined grade of about 0.5
carats per tonne. Current sales are running at about $100
(U.S.) per carat, although Mr. Banning grumbled, "I
think we're getting nailed by about 15 to 20 per cent by
De Beers right now." If so, it wouldn't be the first time
that the company had been nailed by De Beers.
With a breakeven grade estimated to be around 0.35
carats per tonne, cash flows from Leopard could range
from $2.5-million to as high as $7-million, depending on
where the mining was taking place. The more realistic
assessment of Leopard will also include investigating
better mining methods. The company has hired two
Canadian mining consultants to evaluate potential
savings that might be gained through mechanized
mining. Meanwhile, the Marsfontein operation continues
to slowly wind down. The ore is expected to be
exhausted this summer, although lower grade alluvials
and other stockpiles will be processed for several
months. Mr. Banning also confirmed the suspected bad
news about the M-8 fissure that had been discovered last
year. "I don't think it's thick enough to make it," he said.
SouthernEra remains hopeful of a breakthrough in
Brazil. The company continues to test sample the alluvial
deposits in hopes of locating a primary diamond source.
The testing program involves collecting 100-kilogram
samples and processing for diamonds and indicator
minerals. The program has apparently yielded two
targets, one of which is considered more promising due
to higher concentrations of garnets in the samples.
Although the company professes to hold high hopes, the
exploration budget for this year remains fairly modest, at
around $1.5-million. The South American diamond
search also extends to Uruguay, which the company
hopes will be "a quick in and quick out." With permits
due to be granted in a few weeks, preliminary results are
expected quickly. Results will be slower to come by
from the exploration program in Australia with Caldera
Resources Ltd. Work is just now commencing, as the
intense heat of summer begins to moderate. The geology
of the area presents its own roadblocks, with few
outcrops at surface.
Meanwhile, the more things change, the more they stay
the same, as the new crew appear poised to announce
yet another new diamond play. SouthernEra has
something new up its Canadian sleeves and that
something will apparently involve joining the search for
Ontario diamonds. Mr. Banning said that it was too early
to make a public comment as to where that search
would begin but he stated that the move would likely
involve some combination of staking, property option
agreements and joint venture partnerships. Further
north, SouthernEra remains reluctant to abandon
exploration in the Northwest Territories. The Back Lake
joint venture has identified a few new targets and drills
should begin turning there and at Yamba Lake as well,
although the current exploration budgets are a mere
shadow of their former selves. Meanwhile, the market
continues to react coolly to SouthernEra, taking a wait
and see approach to the latest changes and promises.
SouthernEra gained 10 cents Tuesday, to close at $2.10.
(c) Copyright 2000 Canjex Publishing Ltd. |
