HARTCOURT IS A GEMM. YOU MAY QUOTE ME ON THAT:
Investors Edge
Institutional Equity Research
John R. Switzer/Brian Vomer www.investorsedge.net July 24,1998
HARTCOURT COMPANIES, INC (NASDAQ: HRCT)
Price $2 5/8 $Book Value/Share $0.13 Investment Opinion Strg Buy
Price Range (52-weeks) $1 ½ - $5 LT Debt $0.00 Market Cap(millions) $27.8m
Shares Outstanding 17.44 million Float 1.0mm 3-yr EPS(E) 100%+
Average Daily Volume 10,000 Dividend Yield (P?fd) N/A
? Juina Mining Corporation, (OTC: BB: GEMM) based in Reno, NV, is a Diamond
Resource/Exploration/Production Company with proven reserve diamond property
in Brazil. GEMM owns the mineral rights to a large property, approximately
2,500 acres, in Brazil?s highest diamond producing region, the
Aripuana-Juina Kimberlite Province. The Company has completed initial
?prove-out? studies and is finishing its milling plant which will be
operational in September, 1998.
? GEMM acquired the mineral rights to Property 1000, a former De Beers
undeveloped property, in the Juina-Aripuana Kimberlite Province of the State
of Mato Grosso, Brazil. The property was one of the top 3 in the Juina
region identified by De Beers in the mid-1980?s as an extensive diamond
field with a concentration of alluvial deposits and Kimberlite. De Beers
conducted in-depth research and exploration in the Juina region before
losing control of the mineral rights to serveral of its key properties,
including Property 1000, The mineral rights were lost through a complicated
merger deal involving a De Beers site holder, Cindam of Brazil.
? The Juina Kimberlite Province is located on top of an ancient, highly
volcanic region of Brazil, that until 20 years ago was highly unaccesible.
Since 1989, the Aripuana-Juina Kimberlite Province has been the largest
diamond producing area in Brazil. Of the approximately 1.5 million carats
Brazil produced in 1993, over 50% came from the Juina region.
? Geological studies done in the Juina region, and one done recently on
property adjacent to GEMM?s property 1000, concluded that approximately 40
million carats of diamonds are contained in about 2.1 million cubic meters
of diamond bearing alluvial gravel. Numerous Kimberlites are known to exist
in high density in the Juina region and specifically on Property 1000 which
could contain significantly higher concentrations of diamonds than original
estimates. Kimberlites are a special type of geological formation which are
the primary source of concentrated diamond deposits extending 100?s of
meters below the surface. In addition, incorporating up-to-date milling
techniques, GEMM believes it can significantly increase the amount of
diamonds it extracts from the alluvial gravels.
? In 1990, a 74 carat and a 43 carat diamond were found in the surface
alluvial gravels on Property 1000. A founder of GEMM?s project on Property
1000 purchased his first parcel of Juina Diamonds in 1991 for $175 per
carat. The Company is conservatively estimating that they can sell its
production for an average of $20 per carat. We believe the Company?s
production will be worth significantly more than $20 per carat based upon
examination of studies done by a reputable independent consulting group from
Canada. However, we are using the $20/ carat figure in all of our
projections.
? Based upon the extensive exploration done in the Juina area and
specifically on Property 1000, GEMM anticipates production of nearly 1
million ?uncut? carats in its first year of production, beginning in
September, 1998. By year three of production, GEMM should be able to
produce about 3 million carats annually. The Company has been approached by
several credit worthy diamond buyers, each of whom is interested in
purchasing all or a substantial portion of the Company?s first 3-years
production. Each buyer has already signed a letter of intent with GEMM.
? Based upon GEMM?s high quality earnings potential (estimated 63% after-tax
margin), proven resources at Property 1000 in the highly concentrated
diamond reserve region of Juina, and further acquisitions of mineral rights
in the Juina region by GEMM, we believe the Company would be more fairly
valued at between 15X ?to- 20X 1998E earnings or between $5.70 ?to- $7.60
per common share. Compared to other high-growth resource companies, GEMM is
significantly undervalued. We recommend purchase of GEMM as a STRONG BUY.
The Company
Juina Mining Corporation, (OTC: BB: GEMM), based in Reno, NV, is a Diamond
Exploration/Resource/ Production Company with diamond producing property in
Brazil. In addition to exploration and mining of diamonds, the Company also
has an extensive ?Un-Cut Diamond? marketing division, which allows the
Company to bypass the multi-level wholesaler aspect of the diamond
business.
The Company?s primary project was founded in 1991 by Steve Issod, a leading
expert in the Diamond Resource Industry with over 20-years experience. Mr.
Issod received his graduate gemologist degee from the Gemological Institute
of America in 1981 and is GIA certified. He immediately began working with
?rough?, uncut diamonds, reselling them via the wholesale market, eventually
developing an extensive network of buyers throughout the world for the gemms
he purchased directly from diamond production companies. In 1991, Mr. Issod
established a buying office in Juina and purchased his first parcel of Juina
diamonds (1160 carats) from a production company in the Juina-Aripuana
Kimberlite Province, in the State of Mato Grosso, Brazil. Mr. Issod
purchased the parcel for $175 per carat, and was able to sell them at a
great profit due to their high quality, selling some of them for as much as
$20,000 per carat. In the early 1990?s Mr. Issod began investigating
opportunities to purchase mineral rights in the area, finding it to be
incredibly rich in diamonds. Through a complicated merger deal involving a
De Beers associate, CINDAM, De Beers lost the mineral rights to several
properties in the region which they had spent millions on in exploration,
research and property development. Between 1995 and 1996 Mr. Issod and two
of his associates obtained the mineral rights to three properties including
?Property 1000?, a parcel of land covering an area of 1000 hectares (2,471
acres), in 1995. Later in 1995 Mr. Issod bagan raising funds privately for
exploration and development of the properties. Initially, he raised $1
million, and has since raised more money in order to form Juina Mining
Corporation, Inc. Throughout 1996 and 1997, Juina Mining Corporation
performed its own exploration and research including on Property 1000 (in
addition to the extensive studies which had already been done by De Beers
prior to Juina gaining the mineral rights), ?proving ?out? the reserves on
the land. Convinced of the properties ?proven? potential, the Company
purchased a public shell, International Brewing and Manufacturing, changing
its name to Juina Mining Corporation, Inc., (OTC: BB: GEMM). GEMM will
begin operating its newly constructed plant in Juina in early September,
1998. GEMM has a 70% working interest in Property 1000.
Principal Mining Property
Juina Mining Corporation (?GEMM?) acquired the mineral rights to ?Property
1000? in the Juina-Aripuana Kimberlite Province of the State of Mato Grosso,
Brazil. The property was originally owned by De Beers, who lost the mineral
rights through a complicated merger deal. The property was one of the top
three in the Juina District identified by De Beers in the mid-80?s as an
extensive diamond field. De Beers, through its operating subsidiaries
conducted in-depth research and exploration in the area finding a high
concentration of diamonds (surface level ?to- 5 meters) and Kimberlite
(deep drilling) especially on three properties, one of which was ?Property
1000?, which GEMM has the mineral rights to. Kimberlites are a special type
of geological formation which are the primary source of concentrated diamond
deposits extending 100?s of meters below the surface.
The Aripuana-Juina Kimberlite Province is located on top of an ancient
highly volcanic region, the Guapore Shield of the Amazonico Craton, in an
area of Mato Grosso that until 20 years ago was very remote and difficult to
reach. Reports of alluvial diamonds (surface region diamonds in ancient
waterways and rivers) began to appear in the mid 1970?s, and since at least
1989, the Aripuana-Juina Kimberlite Province has been the largest diamond
producing area in Brazil. Of Brazil?s total diamond production in the early
and mid-90?s, approximately 70% came from the State of Mato Grasso, with the
principal production originating from the Aripuana-Juina Kimberlite
Province.
Juina is located at the Southern margin of the Amazon Basin, about 350 miles
north of a major interior Brazilian City, Cuiaba. The city has a population
of about 1 million, and is the regions major urban center, serviced with
regularly scheduled daily flights from Sao Paulo and Brasilia. Rio de
Janeiro is about 1,100 miles southeast of Juina. Property 1000 is located
about 42 miles southwest of the city of Juina. The land is about 300 meters
above sea level and is mostly flat. The topography, vegetation,
forestation, soil, and subsoil characteristics, and weather conditions offer
no impediments to a year-round mining operation. Several active diamond
recovery operations are located near Property 1000 and the town of Juina,
mainly placer and river dredging operations. These undertakings range in
size and scope from small groups engaged in recreational type mining to
large mining companies with full scale operations.
Geological Studies and Property 1000 Potential
Over a period of years, extensive exploratory work has been done in the
Aripuana-Juina Kimberlite Province, including the Property 1000, which GEMM
owns the mineral rights to. One study on a property adjacent to Property
1000 concluded that 38.6 million carats of diamonds are contained in 2.1
million cubic meters of diamond bearing gravel. This equates to about 18
carats of diamonds per cubic meter of gravel. The exploration work done in
the Juina area, including Propery 1000, (initially started by De Beers prior
to their losing the mineral rights) has been a major undertaking, carried
out using standard geological evaluation techniques to determine the diamond
bearing characteristics of the property. Hundreds of soil and gravel
samples, and cross sections of core drilling and pit excavations were
gathered. In addition, magnetic surveys were taken for geologic evaluation
purposes and subsequently interpreted by a geophysicist. The studies all
determined that several properties in the Juina region, including Property
1000, were viable diamond mining properties, even just for alluvial gravel
mining (surface mining). In addition, the studies indicated a heavy
Kimberlite presence on Property 1000.
GEMM enlisted the services of a well-known industry leading Diamond Mining
Consulting Firm, MPH Consulting Limited, to conduct a comprehensive
geological survey and appraisal of Property 1000 and other properties in the
region the Company anticipates purchasing. MPH confirmed prior studies on
Property 1000 done by De Beers which identified Property 1000 as one of 3
main areas of interest which appeared to contain a high density of both
alluvial gravels (surface diamond ore, to about 5 meters) and Kimberlite.
MPH concluded that Property 1000 and the other target properties held
sufficient alluvial gravels to go ahead with a pilot processing plant, while
further exploring and investigating the Kimberlites known to exist on the
property.
In addition, GEMM has done its own geological surveys, magnetic surveys, and
other exploration work on Property 1000 in order to ?prove-out? the
properties potential, finding it economically feasible to begin mining
alluvial gravel, while beginning to further explore the large presence of
Kimberlite located within the boundaries of the properties. Due to the
result of the Company?s studies and the Geological Report done a reputable
independent consulting firm, GEMM has built a milling plant which will be
operational by early September, 1998. Operations for the first few months
will only focus on mining the alluvial gravels, while Kimberlite exploration
and ?prove-outs? will be undertaken towards the end of 1998 with the hopes
of beginning major drilling in 1999. Full-blown Kimberlite drilling on
Property 1000 (to be started once the prove-outs are finished) will be an
expensive venture for GEMM. The Company will most likely partner with a
Senior Mining Concern (major Kimberlite driller/mining and exploration
group) to begin the undertaking of removing diamonds from the Kimberlite on
Property 1000 and other properties to be acquired.
Recovery of Alluvial Gravel Diamonds: The mining and recovery of the
diamonds from alluvial gravel is straight forward. Phase I: The land will
be stripped, alluvial gravel ore transported to the milling plant for
processsing. The gravel will be run over a series of screens and jigs to
concentrate the ?heavies? which contain the diamonds. This concentrate is
then concentrated manually until nothing but an assortment of diamonds
remain. The process is an inexpensive, high margin, and effective method of
processing alluvial gravel ore with high concentrations of diamonds such as
the alluvial gravel found on GEMM?s Property 1000. Late Phase I & Phase II,
Increased production: GEMM will incorporate a washing plant consisting of a
laser sorter and a heavy liquid specific gravity system along with
additional material handling equipment for more mechanized handling and
sorting of the diamonds.
The Opportunity and the Market
Based upon the extensive exploration done in the Juina area and specifically
on Property 1000, GEMM anticipates production of nearly 1 million ?uncut?
carats in its first year of production, beginning in September of 1998. By
year three, the Company should be able to produce about 3 million carats
annually. At this level of production, GEMM believes it will be able to
process alluvial gravels from Property 1000 for approximately 20-years.
These estimates are soundly based upon the ?prove-out? studies conducted by
GEMM and its consultants. These estimates do not include the potential of
mining the Kimberlites on the property or the mining of any other properties
GEMM is currently evaluating for purchase in the Juina region.
GEMM has estimated the value of the alluvial production to be worth a
conservative $20 per carat. Parcels of diamonds recovered from Property
1000 by small independants called ?garimpeiero?s?in the late 1980?s and
early and mid 1990?s were routinely sold for much more than $20 per carat.
In 1990, a 74 carat and 43 carat diamond were found by small miners on
Property 1000. Mr. Issod purchased his first parcel of Property 1000
diamonds for $175, quickly selling the uncut diamonds at a substantial
profit, leading him to seek the mineral rights to the property. Since GEMM?
s purchase of the mineral rights to Property 1000, it has been secured,
keeping small independants from further exploiting GEMM?s resources.
GEMM has already been approached by several credit worthy diamond buyers,
each of whom is interested in purchasing all or a substantial protion of the
Company?s first three-years production, estimated to be close to 5.5 million
carats. Each one of these potential buyers has signed letters of intent
with GEMM to purchase the Company?s production at prevailing market prices
with terms acceptable to GEMM. The market for uncut diamonds is currently a
multi-billion dollar annual market, which is tightly controlled by the
production companies and wholesalers. Inudstry standards which have been in
place for years dictate price-per-carat.
Financial Valuation
We estimate that GEMM will be able to produce approximately 300,000 carats
of uncut diamonds (rough diamonds) from alluvial gravel processing only
during the time frame of September, 1998, through December, 1998. Using the
Company?s conservative average selling price of $20 per carat, we expect
GEMM to produce about $6 million in revenue in the last four-months of 1998,
with total 1998 expenditures of $1.26 million, translating into a net margin
of $3.62 million (60%). Production should increase to above 2 million
carats in 1999, alluvial surface gravel processing only with net margins of
approximately 67%. In addition, the Kimberlite drilling should begin
yielding some results sometime in 1999, although we are not including any
Kimberlite production in our estimates.
Other resource companies such as Lazare Kaplan, International, Inc. (AMEX:
LKI), trade at 40X their trailing earnings. LKI?s net margin is about 10%
due to the heavy exploration costs incurred at their production sites.
American Mineral Fields (NASDAQ: AMZ.TO) trades at around $4.00 and lost
($0.06) last year. AMZ.TO doesn?t have nearly the proven reserves of GEMM
and is trading well in excess of 40X its forward earnings potential over the
next several year periods. GEMM currently trades at a value of $3.00, or 8X
its anticipated earnings of approximately $3.6 million, EPS of $0.38. In
addition, due to the fact that GEMM?s primary source of revenue will come
from proven alluvial gravel reserves, a low-cost, high-margin, type of
diamond mining (about 15% expenses to produce salable diamonds), and the
Company?s average tax rate of about 22% for U.S. and Brazil combined, we
believe the Company?s earnings are much higher quality than other resource
companies and should be valued at a much higher multiple companies such as
LKI, or AMZ.TO.
Based upon GEMM?s high quality earnings (63% after tax margin), proven
resources on Property 1000 in the highly productive Juina region, and
further mineral rights acquisitions expected in the Juina Kimberlite
Province , we believe the Company would be more fairly valued at between
15X ?to- 20X 1998E earnings or between $5.70 ?to- $7.60 per common share.
Compared to other high-growth resource companies, GEMM is significantly
undervalued. We recommend purchase of GEMM as a STRONG BUY.
Juina Mining Corporation, currently trades on the NASDAQ OTC Bulletin Board
(OTC: BB: GEMM). The Company is trading at a significant discount to its
fundamental underlying valuation as compared to other high growth diamond
resource companies with the proven reserves of GEMM due to a lack of
following among NASDAQ broker-dealers. |
