Analysts not convinced
Rex is a find
Keith Damsell
Financial Post
Speculation Rex Diamond Mining Corp. may have
its hands on a diamond discovery in North Africa
has investors cheering -- and analysts wary.
Exploration news from remote Mauritania has sent
the shares (RXD/TSE) of the little-known Toronto
junior on an impressive rise. The stock climbed
five-fold from the $3 range in October last year to
a record high of $15.20 on Jan. 6. One year ago,
shares traded in the $1 range.
Last week, the run-up had Serge Muller, the firm's
chief executive, president and chairman, predicting
the stock was on the verge of being added to the
Toronto Stock Exchange's bellwether 300
composite index. Such a move would attract added
market interest since mutual fund and pension
managers tend to buy based on the index.
The TSE did issue some index changes on
Thursday but Rex didn't figure in the mix and this
may have contributed to a two-day $4.60, or 30%,
sell-off. The shares closed yesterday at $10.90, up
50¢.
Rex's market capitalization recently peaked at
$922-million, a value greater than Canadian firms
with proven resources or actual producing mines.
Dia Met Minerals Ltd. of Kelowna, B.C., owner of
a 29% stake in the successful Ekati diamond mine
in the Northwest Territories, has a Bay Street value
of about $645-million.
Toronto's Aber Resources Ltd., owner of a 40%
interest in the nearby Diavik project, has a market
cap of about $512-million.
The comparisons have precious metal analysts
worried, many of whom declined to speak for
attribution about the soaring stock. Rex's high price
"is out of keeping with the rest of the sector," said
one Toronto analyst.
"It's quite clearly overdone," agreed a
Vancouver-based industry source, who says there's
little data from the company to support the current
share price.
Rex, the operator of two small and unprofitable
mines in South Africa, has exploration rights to
100,000 square kilometers of Mauritania. Through
airborne surveying of the impoverished country, the
company has identified about 80 geological
anomalies. To date, Rex has found four kimberlite
pipes in the desert. At least one of the four pipes
contains diamonds. Important details regarding gem
size and quality have yet to be released and are not
expected for two weeks or more.
"The difficulty we have with Rex is that no
quantifiable parameters, such as sample weights
and macro-micro diamond counts, have been
reported," notes David James, Winnipeg analyst at
Canaccord Capital Corp., in a Dec. 22 report on
Rex entitled "Reporting standards?" Mr. James has
a "sell" rating on the stock and a 12-month target
price of $1.
The skepticism of Canadian analysts has failed to
make a dent in the huge appetite for Rex among
small European investors. About 85% of the
company's 60.7-million shares are held in Europe.
While most Rex executives reside in Europe, the
company's official head office is the downtown
Toronto office of Grunwald & Co., a small
accounting firm.
Antwerp, Belgium, is the centre of the recent
frenzy. The city is the home of Mr. Muller, a man
well known in diamond circles. Mr. Muller
controls about 31% of the company's stock. His
personal holding in Rex has grown from about
$13-million a year ago to a recent high of
$286-million.
Rex's lofty gains "don't make me nervous," said Mr.
Muller. "The stock market works on anticipation of
news. What you have here is the result of a lot of
interested parties that I have talked to over the last
month. They're quite wealthy individuals and
companies that are investing in the stock in a very
systematic way in anticipation of news."
The anticipation is widespread and furious. On
Dec. 22, The New Gazette, a Belgian daily, ran a
front page story on Rex bearing the headline
"Glittering diamond find for Antwerp." The article
quotes Luc Rombouts, Rex geologist and executive
director, predicting the Mauritania find will result
in annual profit of at least $1.8-billion for the
company. Meanwhile, Belgian investors are
heating up chat rooms on the Internet with rumours
of a Rex takeover by diamond heavyweight De
Beers Consolidated Mines Ltd. Sources at both
Rex and De Beers confirmed there is no imminent
deal in the works.
"You hear about Rex Diamonds everywhere, in the
pubs, in the restaurants," said Sven Sterckx,
financial advisor at Deireckx Les & Co. in
Antwerp. "I don't advise my clients to buy. If they
want to gamble on the stock, I tell them the risks....
They have to be careful. There is a lot of hype."
Fears Rex will be unable to live up to expectations
have analysts concerned the company could leave
behind some sorry investors. "Either the
[Mauritania diamond] grades are very sweet and
there's a disclosure problem or the market's been
carried away," said a second Toronto mining
analyst.
Surveillance officials at the Toronto Stock
Exchange have reviewed Rex and are satisfied.
"Every piece of information has been disclosed to
the market," said Steve Kee, TSE spokesman.
Above from today's Financial Post
Happy investing,
andras |
