Elusive alluvial diamonds a problem for miners

Investors in alluvial diamond mining firms Trans Hex and Rockwell Diamonds may well have found their investment returns as desolate as the Northern Cape’s Orange River where these miners operate.

On a five-year return basis, shares in Trans Hex have gained only 14% while Rockwell is down 71%. During this period, the two companies have been in a constant flux of reorganisation and restructuring of their SA operations.

In the past, a lot of the diamond mining in the Northern Cape was done by artisanals, mostly farmers, who operate on a potluck basis and don’t have ranks of offshore shareholders to pacify when things go wrong.

And when things go wrong it’s almost always a failure to tackle the challenges of the difficult nature of mining in the region. The fact of life in Orange River diamond mining is that the geology makes for widely dispersed diamond deposition.

Unlike the diamonds found in kimberlites, the volcanoes or pipes from which diamonds were first formed hundreds of millions of years ago, alluvial diamonds are widely dispersed as they are carried along rivers of lava from the volcanoes.

It’s for this reason that Johan Dippenaar, CEO of Petra Diamonds, is wary of the alluvial diamond sector. 

“Diamonds in a kimberlite are well distributed and known whereas in alluvials you don’t know if you’ve missed a million-dollar stone,” he said. It’s therefore hard to measure revenue losses.

In an effort to mitigate this risk, Rockwell Diamonds has spent millions of rands investing in X-ray equipment that’s able to spot the gems when they come along. It’s also why it has targeted a mining rate of a staggering 500 000 cubic metres of gravel per month. So far, it hasn’t achieved that type of volume, which lies at the basis of the firm’s problems. Trans Hex also has to target volume.

However, shares in both companies are strongly up so far this year. At the time of writing on 21 June, Trans Hex’s share price was 34.5% higher year-to-date while Rockwell was 36% higher, according to INET BFA.

James Campbell, CEO of Rockwell, said the share bump was on small volumes. “We are very illiquid,” he said. However, he described the firm’s first-quarter production figures, published on 14 June, as “an improvement” with volumes, grade and value per carat all significantly up. He’s right to be cautious about massive improvements in fortunes.

The company briefly edged into profit-making last year but that was an exception, a performance which led to the closure of the firm’s Johannesburg office and some operations in the Middle Orange River, notably Saxendrift, in favour of Remhoogte Holsloot Complex. At $20m (around R294m), the debt situation is worrying for a company with a market value of R82.4m.

Mark Bristow, the non-executive chairman of Rockwell Diamonds, said the company is hoping to “spread the base” of its assets. “Fundamentally, the diamond industry has just got to be a good investment,” he said in an interview with finweek.

“But it’s so hard in this environment right now and Rockwell is very exposed to alluvials. We’re working hard to spread the base,” he added, hinting at possible corporate activity that would achieve this. 

For his part, Campbell said the company continued to evaluate organic and acquisitive growth – a tune the company has been playing for several years without moving much.

“All the junior diamond companies are trading at 10% of their real value and they’ve got projects that need R100m or R400m to actually unlock those assets. There’s nothing forthcoming. So you’re in that backwater,” said Bristow, who in 2014 pumped $1.1m of his own money into Rockwell Diamonds. So no pressure then.

This article originally appeared in the 30 June edition of finweek. Buy and download the magazine here.

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