<<<Hate to play Devil's Advocate, but nobody is talking about the down side of this one>>>>
No problem at all Abbeydale! I've stated that I'm in this one for the risk/reward ratio. The reason the share price is what it is right now is because there is risk involved. If there wasn't, it would already be much higher!
Here's what I see as the downside risk on DMW.
1) The fighting: Angola has been in and out of fighting for the past 23 years. Throughout that time there have been some cease fires, the most recent of which was brokered through the U.N. in 1993 I believe. Though these "truces" have stopped the immediate/open fighting between the government troops and the Unita rebels, the underlying problems have remained. With these problems remaining, things eventually simmer to a boil, and then the fighting begins, the current fighting showing this point.
Now, from what I can tell, there are some differences from previous fighting. The government seems more adamant to go after the Unita rebels once and for all. They've been working through U.N. channels for some time now, but seem frustrated that this is not really producing the results they want (i.e., underlying problems remain). So the government seems ready willing and able to fight it out and be done hopefully once and for all. I think though that the government has found that the rebels are more armed than they had thought. In the end I think they will be successful, but it is certainly not going to be as easy as they had hoped for.
Another issue that plays in there is that the Unita forces are not united. There are factions within them and with all factions, some more radical and some more moderate. Not sure what this means or where it is heading.......just information at this point.
So what does this mean for DMW? As noted, their mines are about 500 hundred kilometres from the fighting which is taking place in two city areas to the southwest, Huambo and Kuito (see map lib.utexas.edu If the fighting were to become much more widespread, then DMW is in trouble. Now, having said that, the rebels only really have limited fighters and need to concentrate their efforts. We're not talking big armies here.
So why the attack on the Yetweyne mine in the first place? I don't really know. It just doesn't make a lot of sense as it doesn't have a lot to do with the reasons for the fighting in the first place between the Government and the Unita rebels. It almost sounded more like some weird random attack than part of any organized strategy. If it was part of a strategy, then why leave the Luo mine alone, which to this day continues to operate and is actually closer to where the fighting is? I don't know. If considered a random act by a bunch of thugs, it is both more encouraging and more discouraging. It is encouraging in that it really isn't part of the fighting or what the fighting is about. It is discouraging in that the Unita forces really don't have a grip on all the different factions within themselves, and these screwball acts of violence can happen.
Anyway, to summarize this, if the fighting moves to the Northeast, then DMW will have to re-evaluate their plans to re-open the mine. This would not be good. Personally, I don't see this happening, but it is a downside risk all the same.
2) Cash flow: DMW needs $$$'s. Yetwene was to be their cash cow in the short term, with Luo coming on line with their Kimberlite mines in 1999.
From another recent email to me from the company:
<<<The Yetwene mine is designed to be the primary cash producer for the company until the kimberlite diamond production is fully established at Luo. Yetwene had just completed the commissioning process prior to the attack and November was the first month that full production (plus 10,000 carats) was expected.>>>
The Luo mine is cash flow positive, but not as much as it will be once they start mining the Kimberlite pipes. Current mining is alluvial. Again, from another recent email I received from DMW:
<<<Thus, Luo produces a small positive cash flow for the company most months. It must be noted that we acquired the Luo property for the production upside afforded by the property's two large kimberlites - Camatchia and Camagico. The alluvial production was intended to get us started before we moved to kimberlite production - hopefully in 1999.>>>
<<<It must be noted that we acquired the Luo property for the production upside afforded by the property's two large kimberlites - Camatchia and Camagico. The alluvial production was intended to get us started before we moved to kimberlite production - hopefully in 1999.>>>
I asked the company point blank what would be the maximum downside if they do not put the financing needed in place. Their response:
<<<The worst case scenario is that if financing is not available, the future of our operations in Angola may be in jeopardy. However, the Luo and Yetwene mines are two of the best diamond projects in one of the world's premier diamond-producing the countries and we remain confident that the necessary financing will be secured.>>>
Again, I do like the frankness/honesty of the above reply. Personally, I would tend to think that the financing will be there. This isn't some company with some land claim that is looking for financing to start studying what's under the ground (usually nothing). This is company with known proven operational mines with 1000's of carrats of known gem quality diamonds. Fighting in the country aside, the mines are far too lucrative.
3) Octagon Selling: While this is not a downside specifically to the company's operations, it does affect the share price. Personally I think it creates an awesome buying opportunity. As I said before, if they want to have a fire-sale, then fine by me! From what I've been able to find out, they're a jitney house for U.S. based buying and selling. I "think" a lot of the selling that they were doing was tax loss related, so hopefully it's done. If it does continue in the new year, it just means we'll have to be a little more patient until they finally run out. Either way, now or in a little while, they will be out, and the price will rise. I've included this bit on Octagon not that it is really just a downside risk.....really just more of a downside nuisance at this point.
So there you have my thoughts on the downside. The risk IS there. The potential payoff IS huge. I'm confident enough in it that I've been accumulating shares for the past 2 weeks now. I imagine I will continue to do the same for a while longer as well, providing the price doesn't get too out of hand. All the best everyone. Of course, make your own best decisions evaluating your own risk/reward tolerance.
Abbeydale, you mentioned "BTW, good DD Kevin". Damn, is that what it is?!! ....And here I thought it was just me getting woken up too early in the morning by the kids! :)
Best of the New Year everyone!
Kevin |
