TD REPORT - GREAT INFO
Marsfontein Operating Results Force Higher Estimates For Earnings and cash Flow
On October 23, Southernera announced its financial and operating results for the third quarter ended September 30. Earnings of $0.46 per share and cash flow of C$0.82 per share for the quarter were higher than expected by the market. We were well aware that our estimates published in in our Aug 24, 1998 report were to low as reports of the early Production were made public. Southernera and its partner DeBeers encountered very high grade ore in the first few weeks of mining at the M-1 Pipe at Marsfontein in South Africa . The surface gravel's at Marsfontein have been found to be much richer than the in situ grade calculated for the M-1pipe. Diamond values have also been higher than anticipated due to the presence of significant of larger stones.
We have raised our 1998 estimated cash flow per share from $1.00 to $1.52 to reflect the higher surface grades. Our 1999 estimates of approximately $2.00 is under review pending mining experience from the primary kimberlite which should obtained over the next few weeks. We believe the grades used in our analysis may prove low based upon the recent production results from the near surface material, the higher in situ grades from the exploration drilling and the frequent occurrence of larger stones. We continue to rate the shares a BUY.
Financial Position
Southernera should have substantial net free cash flow in the next several quarters, enough to fund all potential capital spending and also to consider acquisitions. We forecast that Southernera could have $75 million - $80 million in cash by year –end 1999, with no debt --- certainly an available position for an aggressive exploration company. The company drew on a short term credit facility to make their payment of 61.25 million South African Rand to purchase the 14% in Marsfontein held by Randgold and Exploration, but this amount will be repaid from operating cash flow well before year end. A summary of the companies financial and operating forecasts is shown in Table 4 .
SouthernEra Resources: Summary of Operating and Financial Statistics 97/98
(All data in C$) 1997A 1998E 1999E 2000E 2001E 2002E
Cash Short Term $18,249 $35,657 $76,340 100,569 $116,131 $130,669
Long Term Debt 0 0 0 0 0 0
Earnings per shr n/a $1.07 $1.56 $0.93 $0.60 $0.56
Cash flow per share n/a $1.52 $2.01 $1.26 $1.00 $0.96
Diamond Prod
South Africa 0 280,622 537,000 355,000 350,000 350,000
Angola 22,000 57,735 44,040 61,146 77,502 98,310
Total 22,000 338,357 581,040 416,146 427,502 448,310
Other Targets at Marsfontein – The M-1 Pipe at the Marsfontein was the most enticing geochemical anomaly and, in hindsight, for good reason. It was, however, just the first of several targets , only one other of which has been drilled. This target M-3, was drilled by SouthernEra in late 1997, prior to the eruption and subsequent resolution of the property dispute with De Beers over the Marsfontein and, although quite diamondifoerous, has not been bulk sampled. Considered the richest of the weathered gravel's immediately over the M-1 pipe, another alluring target at marsfontein is clearly the the potential alluvial resource downslope from the M-1, resulting from the weathering of the pipe over the millennia. The resource would likely be low grade but could contain a substantial quantity of diamonds and must be assessed by SouthernEra and De Beers.
Northwest Territories , Canada --- Southernera remains active in Canada's arctic, although none of their projects is in advanced exploration stage at present. The company announced a couple of weeks ago that it has had discussions with New Indigo Resources (not rated) regarding a merger of their companies New Indigo has a %50 interest in a large property north of the Lac de Gras mine developments of Dia Met Minerals and Aber resources and has three diamondiferous Kimberlites and good exploration upside. The attractive exploration property (the diamond deposit found does not appear to be economical to exploit on its own ) is marred by lawsuits involving New Indigos joint venture partner, Lytton Minerals an affiliated company. While SouthernEra is clearly interested in the property , it should not , in our opinion proceed
Unless the outstanding litigation is settled.
Angola – SouthernEra operates two alluvial diamond mines in Angola that are modestly profitable producers of gem diamonds. The company is also undertaking a bulk sample of the large CAMAFUCA Kimberlite pipe, also located in the Lunda Norte area in the northwest part of the country. Camafuca had substantial work by former owner de Beers and SouthernEra is evaluating the feasibility of commencing a larger –scale surface mine on the property. Angola is currently a high risk environment due to the apparent resumption of hostilities between the government and the Unita rebels. Although it is hoped that a return to civil war can be averted the danger of operating in the area is obvious after a rebel raid on the Yetwene alluvial of Diamond Works. Until the security of the area can be confirmed , Southernera will likely move slowly on any major capital expenditure in this highly prospective country.
Other Klipspringer Projects – SouthernEra has a large land position in the which continues to yield new Kimberlite discoveries. During the past several months, the company has discovered new fissure deposits at Meinhardskrael to the east of their plant, a small new pipe called the Kudu approximately 1.5 kilometers north of the plant and a new fissure called the Eland (near the Kudu pipe) SouthernEra is evaluating all of these new discoveries for diamond content as well as following up other geochemical anomalies which could lead to other discoveries. He region is clearly a kimberlite province and some of the bodies are highly diamondiferous, making it a very exciting exploration target. When one considers the M-1 pipe has roughly the surface area of a basketball court and contains over US$350 million worth of diamonds, the importance of very thorough exploration cannot be overstated.
Going Forward : Life after the Marsfontein
Although SouthernEra is now a significant producer, the company remains focused on exploration and new developments to add to shareholder value. SouthernEra is currently the third largest publicly traded diamond producer in the world (after DeBeers and Ashton Mining) and certainly one of the most profitable. The cash flow from Marsfontein will be more than sufficient to fund the companies exploration and development programs for the foreseeable future. The most important initiatives at present are the following.
Klipspringer Fissure Developments --- SouthernEra has substantial diamond resources in the Leopard and SugarBird fissures located to the west of their open pit mine at Marsfontein and just north of their process plant. The company is currently doing the detailed engineering and mind planning to develop these fissures for production. The fissures contain good quantities of gem quality diamonds and the current plan is to scale up production gradually over the next three years as the M-1 pipe is depleted (see table 3) While the main plant at the Klipspringer is treating the M1 ore, a new plant will be constructed to process the kimberlite from the fissures. We estimate the modest capital expenditures over the next three years will be sufficient for the eventual production of 250,000 – 350,000 carats per year and cash flow of $20 million - $25 million per year from the Leopard and SugarBird fissures.
TABLE 3 – Not Posted
The M-1 pipe at the Marsfontein is the richest kimberlite pipe being mined anywhere in the world at this time. The very high grades encountered in the weathered gravel's above the primary (unweathered) ore had a value just over US$1,000 per tonne in the first month of Production. Table 1 puts in this gigure in the context of known Kimberlite diamond deposits, including the primary kimberlite ore of M-1 itself. The production grade in September was 5.6 carats per tonne with a value per carat of US$188. The grade is trending lower on average although it remains well above the 3.1 carat per tonne grade estimated from last years drilling and bulk sampling program in the primary kimberlite. We estimate that production will average approximately 4.5 carats per tonne in October and November before the mill begins to treat primary kimberlite in December. Our operating model for the Marsfontein joint venture is shown in Table 2. In our report of August 24 we used, with guidance from the company a grade of 2.25 carats per tonne at an average value of US$150 per carat for the M-1 production. Certainly the weathered gravel's have been an unexpected bonus of substantial magnitude, however we are now relatively confident that the grade of the primary ore will be somewhat higher than forecast. The early weathered from the production gravels contained a grater number of larger stones than anticipated. It is unlikely that bulk sampling would provide a statistically representative figure for this size fraction of diamond and their very likely presence in good quantities in the primary ore would increase the grade (carats per tonne) and probably increase the average value per carat. Our revised cash flow and earnings figures for 1998(essentially the fourth quarter) do not factor in a material change in grade for primary ore. For 1999, each 0.25 carats per Tonne change in grade from our forecast of 2.25 carats per Tonne, would add approximately $0.25 per share to our after tax earnings and cash flow figures of $1.56 and $2.01 per share, respectively.
Table 1 Currently active Diamond Projects and Mines
US$/Tonne Project Mines Company Location
1,052 M-1 Pipe Weathered SouthernEra/DeBeers South Africa
338 M-1 Pipe Primary Ore SouthernEra/DeBeers South Africa
210 Diavik (avg 4 pipes) Aber/RTZ Canada
139 Jwaneng DeBeers Botswana
106 Klipspringer– Leopard SouthernEra South Africa
100 Udachnaya N/A Russia
92 Ekati Diamet/BHP Canada
86 Klipspriger Sugarbird SouthernEra South Africa
78 Venetia DeBeers South Africa
63 Koidu Fissure N/A Sierra Leone
53 Jubilee N/A Russia
50 Letlhakane DeBeers Botswana
32 Argyle CRA/Ashton Australia
31 Orapa DeBeers Botswana
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