SouthernEra Resources Ltd (C-SUF) - Street Wire
SouthernEra clips Klipspringer diamond mine
SouthernEra Resources Ltd SUF
Shares issued 72,878,400 Jan 2 2004 close $ 5.22
Monday January 5 2004 Street Wire
by Will Purcell
SouthernEra Resources has moved to staunch the flow of red ink from its Klipspringer diamond mine, suspending mining operations at least for now. The company cited the strength of the South African rand as the primary cause of the move, but the Klipspringer mine has never quite lived up to the early optimism of the company and its investors when the project was first unveiled in the mid-1990s. With no progress apparent at Camafuca, its other main African diamond project, SouthernEra will place an even greater focus on its Messina platinum mine.
The decision to place the mine on care and maintenance is no great surprise, given the steady stream of losses and the company's increasingly pessimistic attitude toward the profitability of the Klipspringer project. In fact, speculators generally have had much higher hopes for a lucrative cash flow from the project than did the company itself. In mid-2000, company chairman and founder, Chris Jennings, still believed that Klipspringer would be profitable, although he did caution that the operation "will not be any great hell." Nevertheless, few feared that Klipspringer would actually become a significant cash drain.
In mid-2002, SouthernEra told its shareholders not to expect the levels of profitability that its Marsfontein stake had provided, although it still expected the mine would provide the company with some cash to help out with its other projects, and last summer, SouthernEra described Klipspringer as a marginal operation. As well, the company said that the profitability and medium-term viability of the mine hinged not only on the value of the rand, but also the selling price of the Klipspringer diamonds and the amount of rock dilution encountered.
As well, Klipspringer's operation was hampered for more than a month last year by a strike, which depressed SouthernEra's production figures for the second and third quarters, adding to Klipspringer's financial woes. As well, there may have been other, unknown factors at play that served to rapidly inflate the operating costs of the mine, and with Klipspringer's grade and diamond values lagging behind the anticipated levels, keeping the mine running was chewing into SouthernEra's cash supply in a big way.
The rand has come close to doubling its value against the U.S. dollar since a low mark set late in 2001, and that gain would logically translate into a significant jump in Klipspringer's operating costs, which are largely incurred in the South African currency.
Nevertheless, even with the rand near its low, Klipspringer was struggling in the red. In the first quarter of 2002, with the rand worth about 8.6 U.S. cents, the mine processed just under 37,000 tonnes of kimberlite, at a direct mining cost of about $1.55-million (U.S.), or about $42 (U.S.) per tonne. That figure was encouragingly low, but with an average production grade of 0.51 carat per tonne, Klipspringer managed to produce 18,818 carats. SouthernEra's 50-per-cent share of that production generated $578,000 (U.S.) in revenue for the quarter, racking up a loss from mining operations of $544,000 (U.S.).
The rand continued a slow appreciation over the next six months, averaging about 9.4 U.S. cents, but the Klipspringer mine managed to boost its production figures significantly, which actually resulted in a reduced cost per tonne. In all, the mine processed 114,330 tonnes of rock at a cost of $4.57-million (U.S.), a rate of about $40 (U.S.) per tonne. With a grade hovering just above 0.40 carat per tonne, that provided SouthernEra with about 23,175 carats and $1.63-million (U.S.) in revenue, but the company dropped $1.37-million (U.S.) on its share of Klipspringer's loss from mining operations.
The rand grew to about 10.5 U.S. cents in the final three months of 2002, and although production also climbed to nearly 70,000 tonnes, the direct mining costs jumped to $1.93-million (U.S.), inflating the average cost to just over $54 (U.S.) per tonne, and SouthernEra's share of Klipspringer's operating loss swelled to $1.4-million (U.S.) for the quarter.
Over the year as a whole, SouthernEra posted revenues of $3.15-million (U.S.) from its share of 92,250 carats from Klipspringer, which ran at a grade of 0.42 carat per tonne. With about 221,000 tonnes processed and a mining cost of just under $10-million (U.S.), the mine ran at an average cost of about $45 (U.S.) per tonne, but produced less than $30 (U.S.) in revenue, despite what was generally a favourable exchange rate of about 9.5 U.S. cents per rand. As a result, the company's share of the mine's operating loss was $3.3-million (U.S.) for the year.
Back in mid-2000, SouthernEra revealed the results of its feasibility study for Klipspringer, and at the time, a rand was fetching about 14.4 U.S. cents, about 50 per cent higher than the average for 2002. Therefore, it would seem that at least some of the Klipspringer woes lie elsewhere. The feasibility study was based upon a mineable kimberlite reserve of about 3.6 million tonnes, with an average grade of 0.47 carat per tonne. The original study called for quarterly production of about 84,000 tonnes, and that was boosted to nearly 100,000 tonnes in a revised plan.
Based on the original scheme, Klipspringer would have produced about 40,000 carats per quarter, and with an estimated diamond value of $100 (U.S.) per carat, SouthernEra would expect revenues of about $8.0-million (U.S.) on an annual basis, or about $48 (U.S.) per tonne. Although SouthernEra never formally revealed its estimate of Klipspringer's operating costs, a figure of just over $30 (U.S.) per tonne appears to have been used, and earlier some had projected an even lower value.
As things turned out, Klipspringer's costs and revenues for 2002 were nearly inverted from the feasibility estimates. Operating costs were nearly 50 per cent higher than what had been anticipated, but there were significant hurdles on the revenue side of the equation as well. Klipspringer's grade for 2002 was about 10 per cent lower than the feasibility estimate, but the value of the diamonds was a more worrisome obstacle. The 2002 sales averaged just $74 (U.S.) per carat, down about 25 per cent from the feasibility assumption. Those two factors combined to lower the average value per tonne by about one-third. Klipspringer's production rate was approaching the anticipated levels, which was encouraging, but the mine needed significantly higher revenues and operating efficiencies to match the earlier hope.
Last year got off to an encouraging start, as production neared 80,000 tonnes for the quarter, and although a rand now bought 12 U.S. cents, Klipspringer's average operating cost declined to about $47 (U.S.) per tonne. Unfortunately, the grade dipped as well, to 0.37 carat per tonne, and there was no noticeable increase in the diamond value, and SouthernEra's share of Klipspringer's loss was another $1.1-million (U.S.).
That was the high-water mark for last year unfortunately, as Klipspringer's fortunes hit the rocks over the next six months. The rand had gained in value to about 13.5 U.S. cents, and the mine was shut by a strike that began in early June and ended in late July. The six-week shutdown had a big impact on the amount of kimberlite processed over the six-month stretch, as production was cut roughly in half in both of the second and third quarters. Over that six-month period, just under 80,000 tonnes of rock were processed, yielding about 29,800 carats, for an average grade of 0.37 carat per tonne.
Meanwhile, SouthernEra's portion of the direct mining costs swelled to $3.4-million (U.S.), which worked out to more than $84 (U.S.) per tonne, and the company's share of Klipspringer's loss over the six-month stretch grew to $3.57-million (U.S.), more than had been racked up during all of 2002. The rand has continued its growth spurt to close the year, and the South African currency is now worth about 15 U.S. cents.
SouthernEra was a market darling through the mid-1990s, largely due to its South African diamond projects. The stock went from less than $1 just before the Klipspringer discovery, to a crest of $20.80 in the fall of 1997, on the strength of diamond finds at Klipspringer and Marsfontein. Speculators quickly soured on the company after it lost 60 per cent of its share of the small but rich Marsfontein M-1 pipe to De Beers, and the company's shares dipped back below $1 in mid-2000.
The stock has recovered since then, but it has largely been investor interest in the Messina platinum play that carried SouthernEra's shares to a peak of $8.10 early last year. The profit margins of the platinum play have taken a battering from the strengthening rand as well however, and the company's shares briefly traded below the $5 mark last month.
The Klipspringer project was one of Dr. Jennings's key projects, and it had a high priority through the latter half of the 1990s, as SouthernEra's diamond focus gradually shifted from Canada's North to South Africa. Dr. Jennings was a favourite of investors during SouthernEra's run to the $20 mark, but speculators became increasingly impatient with him after De Beers managed an end run around what SouthernEra thought was its clear title to the Marsfontein mineral rights, and an eventual settlement left De Beers with a 60-per-cent stake in the project.
Dr. Jennings was gradually shuffled off to the sidelines, and early in 2000, he was replaced by Steven Banning, who was far less enthusiastic about Klipspringer, and he did not seem to think much of Toronto either, as he planned to move the company's head office off to Denver. At the time of Mr. Banning's appointment, Dr. Jennings had soothing words of praise and encouragement for his company's new president, but he thought little of the proposed Denver move and even less of being put out to pasture.
Dr. Jennings did not particularly want to run the company, but he wanted to help out on the company's exploration programs. Meanwhile, Mr. Banning and the new crew had other ideas, which did not include the company's founder. That proved to be a tactical error, as Dr. Jennings led a successful counter coup at the company annual meeting just six months later, and Mr. Banning was gone, along with most of the company's directors. Only Dr. Jennings and Patrick Evans remained from the old guard.
Now in his late 40s, Mr. Evans was appointed president and chief executive officer of SouthernEra in 2001, with Dr. Jennings content to go back to his role as chairman. Mr. Evans was formerly a career diplomat with the South African government, serving in the United States and Canada in a number of economic, political and international trade roles. He went on to take a management position with Placer Dome and played a key role when that company expanded into South Africa. Mr. Evans is a citizen of South Africa and Britain, but is now based in Toronto, where his prime preoccupation has been getting the Messina mine running.
Dr. Jennings has been hunting minerals around the world for more than 40 years, and he has been a diamond explorer since the mid-1970s. He has helped find hundreds of kimberlite pipes, including some that were economic, and he played a big role in the Lac de Gras region of Canada in the early 1990s. Dr. Jennings helped Aber Diamond secure its Diavik property, and SouthernEra picked up a significant land position in the region as well. In addition, Dr. Jennings was involved in the discovery of several gold and metal mines, and the Messina acquisition occurred in 1999, when he was still running things at SouthernEra.
The company still has hopes of getting its Camafuca diamond project into production. The large Angolan pipe was acquired in 1997, and a feasibility study pointed to a profitable operation. For the past few years, the project has been on hold, pending approvals from the Angolan government.
SouthernEra moved down 14 cents on Friday, closing at $5.22.
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