First Marathon - Metals and Mining Digest (Nov/98)
Here's a transcript of First Marathon's last write up on SouthernEra. Some what old, however you may find it interesting. I acquired it just recently after First Marathon had refered me to SouthernEra for a copy.
Recommendation: Focus Buy
Excellent Earings
SouthernEra released its third quarter results in late October. Earnings per share in 1998 were $0.46 for the quarter and $0.54 for the year to date, as compared with a loss of $0.03 and a loss of $0.09 in 1997. cash flows per share in 1998 were $0.82 and $0.98 for the quarter and the nine months respectively, against 1997 cash flows of $0.04 and $0.00. SouthernEra produced 125,000 (net) carats during the third quarter and 199,700 carats during the first nine months of 1998.
Superb Margins From M1 pipe:
Southernera results include the first operating results from the M1 pipe in South Africa. SouthernEra holds a 40% interest in this pipe , De Beers hold a 60% interest. These results show clearly the extremely high level profitability of the M1 pipe, in particular the overburden that lies on top of the pipe. This material has been mined commercially since August 31, 1998 and produced 76,000 carats (net to SouthernEra)during the period. Couple with production from the remainder of the Klipspringer property, in which SouthernEra has a
100% interest, production to date has yielded excellent results.
During the third quarter, the company produced $20.7 million of gems from South Africa which were produced at a cash cost of $1.4 million
(another 1.2 million in depreciation). This equates to 93% gross margins and 87% operating margins.
Q4 at M1 Should Be Better Than Q3:
We anticipate similar production from the overburden portion during the first month of the fourth quarter and subsequently higher production tonnages offsetting lower grades. This will occur as the amount of overburden declines and the project mines increasing amounts
of primary kimberlite, which is easier to process. The mine processed
approximately 1,300 tonnes per day during September. We expect the mine will approach 1,500 tonnes per day rate on a six day per week cycle once it has completed mining the overburden. Recovered grades averaged 5.6 carats per tonne in Q3, which we have forecast will decline to 2.25 carats per tonne once 50,000 tonnes of overburden
have been mined out. Nonetheless our production projection for Q4
is 135,000 carats from M1 net to SouthernEra. Although we are also forecasting a decline in value per carat realized from US$186 realized during Q3, to US$150 in primary Kimberlite, we expect an improvement in earnings from the M1 during Q4.
SouthernEra Remains on Track for $1.20 EPS in 1998:
With Angola entering the rainy season, earnings from those operations
for the fourth quarter are uncertain; however, production from Marsfontein should allow SouthernEra to meet our $1.20 estimate. the stock is trading at 6.9x our estimated 1998 earnings and 4.7x 1998 cash flow. (Note that our cash flow estimate for 1998 has been increased to $1.75 per share.) With strong results expected for 1999 and 2000 and attractive exploration potential in Angola, the Northwest Territories and especially in South Africa around the area of the M1 pipe and Klipspringer property, SouthernEra offers excellent value at current levels.
We continue to rate Southernera shares a Focus Buy.
(John Lydall, Kerry Smith, Robert Webb)
Estimates 98E 99E
EPS ($) 1.20 1.45
CFPS ($) 1.75 1.90
Valuation 98E 99E
P/EPS 6.9x 5.7x
P/CFPS 4.7x 4.7x
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