For most South African miners it was a time of darkness.
But on the day that Statistics SA released truly dismal 2008 first quarter figures, a stunning debutant proved the mining sector is not all gloom. Kimberley Consolidated Mining (KCM), a junior diamond miner, explorer and developer made a sparkling appearance. Its share price soared by 11% as it listed on Johannesburg’s alternative exchange (AltX).
For South Africa it’s - what commodities boom?
Still, the economic outlook remains gloomy in the southern hemisphere.
According to Statistics SA, South Africa has "seriously missed the commodities boom". It reckons the mining sector’s contribution to first quarter GDP plummeted some 22%.
Of course everyone expected the mining sector to shrink what with the power crisis, not to mention safety issues and violence against migrant workers. But even economists didn’t think it would be that bad. Most predicted a 10% fall.
Gold, platinum and diamond producers - South Africa’s worst performers - are to blame. They’ve not been producing enough precious material!
Platinum production was down 15% in the first quarter year-on-year... gold was down 19% and diamonds 18%. This was a major reason for South Africa’s economy growing just 2.1% versus 5.3% in the previous quarter.
So, South African miners are trapped in a recession in the middle of a commodities boom. Most lay the blame for this at the door of Eskom, the state electricity supplier. But other reasons are beginning to emerge...
The reserve bank’s efforts are one — it’s trying keep inflation between 3% and 6% at a time when the oil price is going through the roof. This means the bank was forced to hike interest rates to keep inflation within its target. Propping up the currency is another move that has caused many miners to move their production boosts — they’ve gone offshore!
Then there are the new mining regulations. While they came into force as long ago as May 2004, they’ve taken some time to implement. And, of course, new royalty payments came into affect this year. This was the subject of heated debate between the mining industry and the government.
Now, it looks like things are about to get worse...
Electricity supplies may have been stabilised, but winter is on its way. Domestic consumption is expected to rise. More stress on the system does not bode well for its major mining users.
Still, there are gems down there...
You can’t blame South African miners for downing their tools and investors for making for the exit!
But the little newcomer shows that there are still gems in there.
In spite of fears about prospects in South Africa, KCM still managed to arouse a lot of interest when it listed on the JSE’s AltX. Even as Statistics SA announced the mining sector’s demise, the first day’s trade in KCM saw its share price soar.
So what has KCM got going for it?
CEO Hein Le Riche reckons there is massive demand for high quality gem diamonds. And there is a lot of promise in KCM’s prospects. The company’s two main mines (Bo-Karoo and Taung) are on the Orange River. This territory is famous for large high value gemstones.
Mining at Bo-Karoo kicked off in mid-2005. Between then and now the mine has produced an average of 250 carats a month. For the year ending 2009, the mine is forecast to produce 4,840 carats, rising to 6,000 the following year.
Bo-Karoo has "indicated" diamond resources and more certain "probable" diamond reserves of 25,490 carats.
Already the mine has produced some significant white and coloured sparklers - a 98 carat stone in 2006 and a 123 carat stone in 2007. The latter went for $22,000/carat. Then in April this year a 46 carat blue-white stone sold for an impressive $28,000/carat.
At its other alluvial mine, Taung, 3657 carats of diamond have sold for an average of US$751/carat. Better still, 90% of these diamonds are of gem quality and 40% are bigger than one carat stones. A 42 carat Cape yellow diamond from Taung sold for US$918 per carat.
Then there is The Carter Block in the Northern Cape Province near to one of De Beers mines. Here there are known kimberlite pipes - the other type of diamond mining that takes the form of an open pit. There are also alluvial deposits.
KCM has entered a joint venture on this with JSE listed Trans Hex, a company that has kimberlite mining expertise. While this mine is still in the exploration phase, prospects have been judged good enough to begin bulk sampling.
Exploration is also underway at Batloung, another area in the Northern Cape where KCM holds mining rights.
The company may raise capital to fund the development of these Kimberlite prospects particularly the one at Carter.
...and prices are rising for its gems, not just KCM shares
All in all, it sounds as though Mr Le Riche’s confidence is justified.
In two years KCM and its subsidiaries produced more than 12,000 carats. These, he said, sold for more than R120m (just under £8m). In February alone Bo-Karoo and Taung produced more a 1000 carats. These brought a gross income of more than R10m.
Since 2005, KCM has sold diamonds worth R150m. Come February 2009 the company expects to generate an annual R91m in sales. It has already achieved a third of that this year!
Even KCM has underestimated the buoyancy of diamond prices. In its pre-listing statement it said average prices would be around $1900/carat, but that has already shot to $2400/carat.
And Mr Le Riche reckons demand is strong enough to push prices higher still. That means KCM is not limiting itself to South Africa. It has plans to enter Sierra Leone, Angola and Lesotho, too.
One word of warning though! Diamond stocks have been the worst performing of resource stocks.
Still, KCM is already ahead of its revenue targets for this financial year by 30%. It has profits of R4.5m forecast for February 2009. By the end of 2010, the company is forecasting profits of R30,5m.
Even better news! It is talking of paying dividends to shareholders. That would make it the first AltX mining company to do so. And it could send the share price higher!
So, if all goes to plan, this one could be just be a glimmer of light in the South Africa’s darkness.
Keep exploring,
Erin and Isabel
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
