by Warwick Grigor, Far East Capital


Dissecting the moves last week
Last week began as expected with the All Ords coming off 1.6% on Monday. It wasn’t as bad as the Dow though, which had fallen by 4% the previous Friday night. The subsequent fall by the Dow on Monday night left our market in another state of uncertainty, delivering a 3.2% drop in the All Ords on Tuesday. Stability seemed to come back on Wednesday with a 0.8% lift in the All Ords, but a 4.6% fall in the Dow on Thursday guaranteed a down day in Australia on Friday. A 1.38% rally by the Dow on Friday leaves us with the possibility that our week will begin in the green. Still, we are not out of the woods yet.

Doing the charts for the first time in over a week, I was surprised how strong many of them were in the face of the selling. The overall sentiment was weaker, but in most cases the longer term trends held their ground. As of today, the charts are telling this has been a correction in response to the previously very strong market.

Corrections like these always hurt, but with the passage of time they invariably prove to be great buying points for the brave. There has been nothing to change the fundamental outlook, particularly with respect to battery input stocks. There has been no bad economic news, though the exuberance that was surfacing in the market has been hit with a bucket of cold water. The super bulls and the nervous players have both been taught a lesson, and the rational investor can now make less pressured decisions.

The commentators in the market did a reasonable job of calming the nerves of those with whom they communicated, so the fear didn’t accelerate. As one US- based technical analyst summed it up, this was a “wicked correction”. As such, it was not the beginning of the end, but the volatility will remain with us. Being absent from the office, and in Cape Town, the emotional anxiety of these falls was somewhat muted to me. I was more concerned with the meetings with various companies at the conferences.

Arlington Pre-INDABA and 121 roundup

During four days of one-to-one meetings I caught up with about 50 companies across a broad range of commodities, followed by a site visit to Lucapa’s new diamond mine in Lesotho. It is normal for people to enquire as to what were the most interesting companies that I saw, but in most cases there needs to be follow-up analysis. There was one standout for value in the junior gold space worth mentioning though – Golden Rim. See the comments below. The Lucapa site visit was most enlightening. Some general impressions across the board were;

1) Graphite companies were prominent
I saw quite a few graphite companies. Much more work is required here, so I propose to complete a bottom up analysis that looks at the process routes being adopted for the various developments, and why the particular configurations have been selected. That will lead to analysis of the orebodies themselves and the characteristics that require special attention, to achieve a marketable concentrate. That in turn will lead to an understanding of what the products will be best suited to and some insight into what pricing might be received in the market place, but actual marketing and pricing will likely remain somewhat opaque. Rather than shoot from the hip with strong opinions now, I defer any ranking of these companies until I have done the work. However, I feel obliged to say that a 121 with Canadian-listed Next Source Materials left me feeling more confident and positive than I was initially, when I saw them in a group presentation.

2) Diamond companies looked interesting
In Australia, when presented with diamond companies, they are invariably highly speculative and in the exploration camp. Investors are quite rightly cautious, especially given the debacles in the past like Cambridge Gulf. Nevertheless, you can find good companies if you are discerning enough.

Two diamond companies that seemed to have good merit were Diamcor Mining and Frontier Diamonds. Diamcor is a Canadian-listed company that is starting to treat elluvial material from the adjacent Venetia diamond mine, owned by De Beers. Frontier (FDX) IPO’d on the ASX last month after raising $4.1m. That company has purchased two small diamond mines previously operated by Petra Diamonds, and it plans to institute a number of changes that it says will materially enhance the profitability of these mines. The ASX-listed diamond sector is growing.

3) West Africa is making a comeback for gold companies
West African gold stocks have largely been off the radar in this cycle, though a number of companies have been making sound progress. Burkina Faso is continuing to be productive with a procession of new mines confirming its viability as a desired destination. Cote d’Ivoire is more prominent this time around, more so than Ghana, and Mali is delivering good exploration results notwithstanding higher perceived geopolitical risk.

4) The shifting sands of geopolitical risk
Investors always have to be alert for African countries that move the goal posts on mining and exploration companies. Money will move from those countries that foolishly try to over-tax or burden operators in favour of those who encourage investment through better fiscal terms and improved bureaucratic procedures, with greater transparency of dealings.

Ghana, Tanzania and the DRC are recent examples of how good countries can shoot themselves in the foot with taxation and local ownership requirements. Companies operating in these regimes try and talk down the problems, but you would hardly expect them to do anything else. Countries on the rebound include Angola and Zimbabwe. Both countries are rich in natural resources but they have suffered from kleptocratic governments in the recent past. Changes in presidencies have led to statements of change in policies that will lead to an influx of new opportunities for the mining companies. We are told that there will be a change to the South African presidency any day now, with the chance that this will lead to a revival for small companies operating in that country.

Golden Rim offers excellent value at these prices

I hadn’t looked much at Golden Rim Resources (GMR) in recent years, though previously it had always come across as a responsible junior looking for gold orebodies in Burkina Faso. Management has always been sound, if somewhat less than flamboyant, achieving good levels of discovery success.

Of all the gold stocks I saw on the exploration front, Golden Rim looks a stand-out in the value stakes. Capitalised at only $8m, it looks like it could move much higher once the results of the current round of drilling are available (and assuming they deliver to expectations).

A short while back GMR was distracted by the purchase of the Paguanta zinc project in Chile, paying US$1.5m and spending $8m. Even though this has a resource of 2.4 Mt at 5% Zn, 1.4% PB, 88 gpt Ag and 0.3 gpt Au (8% ZnEq), it hasn’t been embraced by the market. Hence, GMR is going back to what it knows best – gold in Burkina Faso.

Within the 100%-owned Kouri gold project is the Banouassi prospect, which comprises 20 parallel gold zones in a strike length exceeding 3 km. It has a stated JORC Exploration Target of 500-610,000 oz at a grade of 1.8-2.2 gpt, to a depth of 70m. A 19,000m drilling program is in progress, with a view to facilitating a maiden mineral resource calculation by April 2018.

Previous drilling has tested 1.8 km of strike, but the current program will extend that strike to 3.5 km and test down to depths of 120-140m. Extrapolating the numbers leads to a figure of more than 1 Moz of gold.

Metallurgical test work has been very positive with 95.5% gold recovery over all ore types, with 36% recovery from gravity circuits. Oxidation levels extend to 20-30m depths, but some of the best recovery rates have actually been from the primary mineralisation. The company expects it will have a large tonnage, low grade open pittable orebody within a 2 km wide major shear zone.

Golden Rim looks great value at these prices with a re- rating to come from the release of the maiden resource in a couple of months time. The Chilean zinc project is probably worth as much as the current market capitalisation in a smart trade sale, meaning there is almost no value in the share price for the Burkina gold project. We should expect a capital raising in the not to distant future though, as cash levels were down to $1.1m as at 31/12/17. This would provide investors with a good entry level,

Lucapa Diamond Co – seeing is believing

Cape Town is a long way to go just for a conference, so many companies take the opportunity to arrange site visits for investors and analysts at the same time. Lucapa was one such company, taking brokers, analysts and investors from Australia and London to the recently acquired Mothae diamond mine in Lesotho. We know about Lucapa’s Angolan alluvial diamond mine that has achieved sales of more than US$100m since mining began, and the quest to find the source pipes, but not many people have really understood the Mothae kimberlite project. That will change though.

Background to the Mothae diamond project

Mothae was first discovered in 1961. It later went through a series of changes in ownership as various parties firmed up the resources, conducting studies and trial mining programs. In the period of 2008-2012, three phases of testing saw 600,000 tonnes treated for the recovery of 23,400 carats. The value of these was US$17m, with the best stone achieving an amazing price of $41,500 a carat. Mothae has a large proportion of the nitrogen-free Type II(a) diamonds, which are generally larger and higher value. The test work recovered 96 diamonds greater than 10 carats, with a number of fancy colour and pink stones.

For various corporate and financing reasons the previous owners never got around to proceeding with full scale production, and Lucara Diamonds eventually relinquished the licence. It may seem strange to let something of value expire, but Lucara had bigger fish to fry. So, the Lesotho Government received the licence back and put it up to tender. Lucapa was the successful tenderer, bidding US$9m. Half of this has been paid with the balance due in mid 2018.

Mothae is the perfect foil for Angola, as it balances out the geopolitical risk. (Having said that, the new President in Angola is making moves to clean up corruption). Whereas Lulo in Angola is an alluvial mine, with less geological and resource certainty, Mothae is a hard rock kimberlite mine with statistical certainty and a minimum 13 year mine life.

While I was aware of the good fundamentals of the Mothae development plan, based on an Indicated and Inferred resource of 1.04 million carats and an IRR of 41%, I didn’t realise how quickly the company was proceeding with the development.

Rapid development progress

Earthworks are well underway and the pre-existing processing plant was recommissioned and turned on last Sunday (ahead of schedule), treating stockpiled materials from the southwest lobe of the pipe and residual material. Pleasingly, diamonds are being recovered already. This 70 tph plant will probably operate at 40-50 tph for the next 10 months, becoming secondary to the new 150 tph (1 Mtpa) plant being fabricated now and due to begin commissioning in the Q3 this year, for commercial production in Q4. One of the tasks of the smaller plant will be to process bulk samples from the neck, SE and north zones where there is potential for another eight million tonnes of feed.

The Phase One development at Mothae, being the 1 Mtpa plant, is funded by the US$15m Equigold loan. Phase Two will eventually double the throughput, 2-3 years later. We could go through a list of a number of reasons why the Company believes its numbers are conservatively stated, including the previous valuation methodology of the diamonds and the belief that some of the best stones previously mined may have been stolen, but the bottom line is that we a dealing with one of the highest value populations of diamonds, in a safe jurisdiction with good infrastructure and a highly experienced technical team. We are not expecting any disappointments.

Brooking discovery in Australia looking very promising

Lucapa is now producing diamonds from two mines. Speculative appeal is just as strong as ever with the Angolan pipes yet to be found. The recent drill results from the Brooking lamproite discovery at Ellendale, where the first drill hole recovered 112 micro-diamonds and seven macro-diamonds from 86 kgs of drill core, offers enormous upside potential once the wet season allows for more field work. The risk profile of Lucapa is falling quickly as fundamentals take over, while the blue sky appeal extends even further. It remains one of our largest investments.


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