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Diamond Mining Mergers

Editorial

Feb 14, 2014 2:33 AM   By Avi Krawitz
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RAPAPORT... The diamond mining sector tends to go through waves of acquisitions. The last round saw Dominion Diamond Corporation and Petra Diamonds emerge as high-volume producers as they snapped up mines that were for sale at BHP Billiton and De Beers respectively. It might make sense that the next round would see mergers between smaller mid-tier companies.

Three companies stand out as possible targets as shareholders may be looking to add value to their existing production and prospective mining developments. In fact, a super merger between Gem Diamonds, Lucara Diamond Corporation and Firestone Diamonds would create a company with substantial diamond volume and value at its disposal. There are also apparent opportunities in Canada as new mines are being developed there. But for now, the focus turns to southern Africa.

From the start, it should be stated that the premise for such a merger is speculative and not based on any official talks between these companies. Understandably, each company declined to comment for this article or had not responded to Rapaport News by press time.

However, there’s no denying that there are some interesting synergies at play among the three.

The most obvious is the makeup of their respective asset portfolios and their geographic proximity. Each has a mining or development project in Botswana and Lesotho and a consolidation of those assets would help lower costs.

Lesotho, which is a small landlocked country entirely surrounded by South Africa, has four potential kimberlite mines. The Lesotho portfolio of the prospectively merged company would consist of the Letšeng mine, owned by Gem Diamonds, Firestone’s Liqhobong mine and Lucara’s Mothae operation. One might not rule out adding the development of the Kao mine owned by Namakwa Diamonds to the mix.

Letšeng has relatively low production of around 95,000 carats a year of high-value diamonds. Larger volume would come from Firestone’s Liqhobong mine, which is expected to be commissioned in the second half of 2015 with projected production of 1.1 million carats a year. Lucara is currently assessing a development plan for its Mothae Lesotho operation while it focused on bringing its Karowe mine in Botswana to fruition in the past year.

In Botswana, Karowe is expected to yield about 400,000 carats, which is projected to generate an estimated $150 million in revenue for Lucara in 2014. That would complement production from the Ghaghoo mine, where Gem Diamonds is expecting to launch production later this year with a plan to eventually ramp up to full capacity of 220,000 carats a year. Firestone is currently undergoing a strategic review of its BK11 Botswana asset.

The combined operating mines of the three companies would have an annual production of around 2 million carats, according to Rapaport estimates. Such volume may not be enough to change the supply dynamics of the market, but it’s a substantial level of output that would help drive shareholder value and raise the industry’s profile among investors. It may also present some interesting buying opportunities for the market with a diversified mix of goods.

When it comes to diamond mining, volume counts about as much as price. Often, companies with relatively low production struggle to drive value despite their bullish outlook for the rough market. In this case, the sum of the whole would certainly be greater than the individual parts. The company would have the potential annual revenue of around $500 million, according to Rapaport estimates, which, with the obvious cost savings, may well be enticing to investors.

Of course, there are many questions that would need to be answered for such a scenario to take hold. The most pressing is if the companies need such a deal. Certainly, each company is confident it has sufficient growth potential on their own to satisfy shareholder expectations in the near term.

Significantly, none are in desperate need of cash to complete their developments, as they may have been in the past. For that reason alone, the opportunity may have past. Firestone just completed a round of financing to see it through the Liqhobong development, while Lucara has received a significant boost with the launch of sales in the past year. Similarly, Gem Diamonds is expected to improve its cash flow statement in the coming year.

Furthermore, as Des Kilalea, an analyst at RBC Capital Markets, noted, much depends on what shareholders, and the Lesotho government, would want. “In this case, the shareholders are very different at each company and a deal would be fraught with personalities,” Kilalea said. “It would be very difficult to get such a deal together.”

Let’s not forget that it’s not the first time the idea has been touted. Back in 2011, Gem Diamonds and Lucara announced they were in talks for a deal before they called it off. The feeling was that the timing wasn’t quite right as their development projects were in their early stages.

In truth, the timing may still not be right. Should a deal evolve at this stage, one would expect all the main assets to be in operating mode whereby their combination would unlock significant value that is not there today. As a result, 2015 may be a more realistic timeline to begin consideration, if at all, while a merger between two of the companies may be more realistic than among the three.

There’s no doubt that each company has ambitious growth plans and management considers their current developments as marketable achievements that can be applied elsewhere in the future.

In a recent interview with Rapaport News, Stuart Brown, Firestone’s CEO, said the company would consider growth through acquisitions in the long term if an opportunity arose that would be profitable and would add value (see the interview from the Rapaport Weekly Report published on January 24, 2014).

Similarly, William Lamb, CEO of Lucara, told Rapaport News he could envisage Lucara being part of a consolidated group of single-asset companies, developing a long-term sustainable company with strong cash flow and long-life assets (see the interview from the Rapaport Weekly Report published on February 3, 2014).

Kilalea added that the diamond industry doesn’t have a strong history of mergers. Mining companies have tended to focus on asset acquisitions in their growth strategies – Dominion and Petra being a case in point. But in such a small community of diamond miners and with such limited opportunities, people talk and deals ultimately get done. It may take a while, but the emergence of a Botswana and Lesotho-focused mid-tier diamond mining company would not be a big surprise. At the very least, current projects are presenting some interesting opportunities for the future. 

The writer can be contacted at avi@diamonds.net.

Follow Avi on Twitter: @AviKrawitz and on LinkedIn.

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.


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Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags: Avi Krawitz, diamonds, Firestone, Gem Diamonds, Lesotho, lucara, Rapaport
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