Here's Canaccord's posting for the day
* SouthernEra Resources (SUF : TSE : $5.05 : Issued 30.4M f.d.)
Our feeling remains that SouthernEra, depending on the outcome of the
Farm Marsfontein situation, may still be tight on funding of the
Klipspringer fissure project and the Camafuca pipe evaluation in
Angola. In Wednesday's conference call, Chris Jennings projected
diamond sales (Sugarbird Blow and Angolan alluvials) at about US$4.5M
by the end of June: we do not have costs associated with this
production, but mining of the 77,000 tonnes or 66,000 carats in the
blow might produce a pretax profit of US$5-10M. The balance of the
102,000 carats from Klipspringer forecast for 1998 would come from the
Leopard Fissure, and might generate a further US$2-3M in the pretax
profit. The feasibility study for the overall underground fissure
mine development is expected to be completed by SRK in August. The
full development of a 2,000 tpd (700,000 tonne/year) underground
mining operation would likely cost (Feb '98 estimate) in the order of
US$20M and take 18 months to complete. (This figure looks low in
light of the C$27.7M spent to the end of Q1/98 at Klipspringer).
The feasibility study will allow a refinement of the cash flow model,
but at this juncture the balance between operating profit and probable
capital outlays looks lean in the next two (plus) years.
We can only guess at the potential (hypothetical?) structuring of a
joint venture with De Beers on M-1. To a depth of 100 m, M-1 was
assigned a resource of 512,400 tonnes grading 3.1 carats/tonne at
about US$140/carat. At $20/tonne direct operating costs and 2,000
tpd, M-1 would be mined out within one year and produce a pretax
profit of US$200M. If SouthernEra ended up with even 20%, the $40M
less applicable tax) would still go a long way to funding the
Klipspringer fissure project, but we cannot forecast this.
Alternatives for SouthernEra might include:
* an equity issue-there was an offer mentioned in the conference
call;
* formalization of lines of credit-apparently these are tentatively
in place; or
* find a strategic major partner-where is Rio Tinto which now owns
17%?
Positive comments about new data on the Camafuca pipe in Angola were
also made in the conference call. We would refer investors to the
terms of the Camafuca-Camazambo project on p. 30 of the 1997 annual
report. In April, a mutual agreement was reached whereby SouthernEra
made a current payment to its partners of US$1.5M by issuing shares
with an obligation of a cash payment of US$6.5M on or before April 20,
1999, with up to 50% of that payable at the Company's option: if the
mineral rights to the farm Marsfontein are acquired, the payment must
be made by April 20, 1999. Before the Angolan civil war, De Beers had
done the preliminary work on Camafuca and one might speculate if the
M-1 could be a re-entry bargain point. We are not sure if Camafuca is
an asset or a liability to SouthernEra considering its obligations.
Our recommendation is at best a HOLD, and generally speaking, we try
to avoid legal entanglements where we have no expertise.
David James (204) 988-9602 |
