FINANCIAL POST, APRIL 25/98:
Saturday, April 25, 1998
SouthernEra finds diamonds aren't forever
By PETER KUITENBROUWER
The Financial Post
Regardless of who wins the battle over what is purported to be an important diamond find in the Northern Province of South Africa, the recent experience of Toronto-based SouthernEra Resources Inc. makes one thing clear: for now, foreign prospecting and mining in South Africa is a speculative affair.
And the element of risk will remain until South Africa settles a largely black-white rift over who owns its mineral rights.
In a country whose currency, the rand, has become deeply devalued, mining is one of the most lucrative businesses. The reform-minded blacks who now run South Africa's government are eager to spread around mineral riches, which traditionally have been in the hands of the white minority.
Ironically, given fears South Africa would nationalize industry and generally become hostile to investment after apartheid fell, the new black-led government is eager to encourage liberalization and foreign investment. Meanwhile, old-guard vested interests, including South Africa's biggest mining houses, are fighting a rearguard action to ensure the continuation of a system that has benefited them for so long.
The struggle over mining rights rippled across the Atlantic this spring and smacked into Canadian investors, who saw their shares in spunky mining junior SouthernEra plunge from a high of $20 last October to $8 on April 16. The shares (SUF/TSE)rebounded this week and closed Friday at $9.80, down 15›.
"It's annoying because a lot of people got hurt by it," says Len Lombardi, a Toronto accountant and long-term SouthernEra investor. "A lot of people got margin calls. They're saying, 'Goddam it, I got wiped out and that's not right.' " Lombardi himself says he bought more SouthernEra stock recently.
Toronto-based SouthernEra is also exploring for diamonds in Angola and the Northwest Territories. But investors took notice last year when the company, prospecting with partner Randgold & Exploration Co. Ltd. on a site it calls Klipspringer about 300 kilometres north of Johannesburg, declared it had found what "could be among the top three active diamond mines and projects in the world."
Reacting to the find on the Marsfontein farm, analysts at HSBC James Capel Canada Inc., TD Securities Inc. and RBC Dominion Securities Inc. wrote "buy" reports on the stock last September. TD put a 12-month target price of $29 on the stock, DS set a three-year target of $43 and James Capel a 12-month target of $26. At that time, the company completed a private placement of 850,000 shares at $17.
To mine the rough stones, SouthernEra sank $18 million into a dense media processing plant at Klipspringer.
Then in January, crisis hit. A group of 29 Afrikaaners came forward, claiming to own the rights. They won a court ruling blocking the government from ceding the rights to Randgold and SouthernEra. They succeeded by March in registering the rights, and in April announced they had sold them to De Beers Consolidated Mines Ltd. for a reported 70 million rand ($19.8 million).
But the court fight isn't over, and De Beers says it "will not take transfer of the mineral rights until mid-May at the latest," to allow a local court to rule on ownership. This week, SouthernEra gained ground when Penuell Maduna, South Africa's mines minister, wrote to The Financial Post saying he will fight in court for the right to turn over the Marsfontein rights to the Canadian-led group.
His letter fits a broader government initiative, outlined last December in its green paper, A Minerals and Mining Policy for South Africa. Unlike most countries, the paper says, about two-thirds of South African mineral rights are held privately - and in white hands. "Government will," it says, "address past racial inequities by assisting those previously excluded."
And Pretoria has the tools. Section 17 of the 1991 Minerals Act gives Maduna power to license minerals if an heir to mineral rights "has not obtained cession thereof and a period of not less than two years has expired from the date on which he became so entitled."
Maduna writes to FP that since the Marsfontein heirs died 30 years ago without heirs registering the mineral rights, he can invoke Section 17. But not, clearly, without a major uproar from those who, during many years of white rule, became accustomed to reaping the fruits of South Africa's fertile soil. All of which puts the government in fairly dicey territory.
"The concern of the government is to unfreeze mineral rights without killing the goose that lays the golden eggs," says Martin Nicol, economic consul at South Africa's Toronto consulate.
"The most controversial section of the green paper is the section on mineral rights," Nicol adds. "It's a messy historical system which needs amendment. The government wants to bring the whole mineral rights system slowly under the control of the state."
Not so fast, says De Beers. From Johannesburg, De Beers spokesman Andrew Cumine tells the Marsfontein story quite differently.
"The legitimate registered mineral rights owners were alerted that, 'Good God, they've found diamonds on our property.' They put up their mineral rights for sale. We bid along with a number of other companies, and this became the latest in a string of mineral rights De Beers has purchased in the area."
For the South African government, victory by the heirs and De Beers would signal the government's impotence in enforcing laws designed to change the age-old system of mineral ownership. It would also badly shake foreign investors' confidence in mining projects.
"The obvious comparison is Venezuela," says Michael Curran, mining analyst at Midland Walwyn Capital Inc., referring to a battle between Placer Dome Inc. and Crystallex International Corp. over a gold deposit there.
"Placer Dome and Crystallex are a toss-up, and as a result all the juniors in Venezuela have come to a grinding halt," says Curran.
"I could see a similar situation in South Africa, if SouthernEra were to lose the property after following the letter of the law."
Meanwhile, SouthernEra mills feed from elsewhere on the Klipspringer site and continues its legal battles. Even without Marsfontein, Lombardi insists, "down the road this is going to be a major diamond producing company."
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