Aim­ing to get back to best friend sta­tus

Financial Mail - Investors Monthly - - Analysis - Char­lotte Mathews

MCubed Hold­ings’ de­ci­sion to take a 26.18% in­ter­est in long un­der­per­form­ing di­a­mond miner Trans Hex could be the be­gin­ning of a much-needed shake-up of the com­pany.

Trans Hex’s shares have largely stag­nated over the past nine years on pro­longed weak di­a­mond prices, the age­ing of its mines in SA, un­suc­cess­ful ven­tures into An­gola and aban­don­ment of what was once a reg­u­lar gen­er­ous div­i­dend. Progress has been slow, man­age­ment’s in­ter­ac­tions with in­vestors tend to be terse and last year was the first time Trans Hex had paid a div­i­dend in seven years.

In 2007 the shares were al­most R17 but for the past eight years they have not bro­ken above 500c. They are cur­rently 356c.

M Cubed is now the big­gest of three ma­jor share­hold­ers, by a small mar­gin. The other two are RECM and Cal­i­bre with 25.12% and Northam Plat­inum with 20.3%. If they all agree on strat­egy it should work well, but if they dis­agree, there could be trou­ble.

M Cubed’s CEO Quin­ton Ge­orge, for­merly of Trin­ity As­set Man­age­ment, is a value in­vestor who over the years has taken bold po­si­tions in un­der­per­form­ing small com­pa­nies such as SA French, Con­vergeNet and Go­liath Gold. RECM’s head, Piet Viljoen, is also a value in­vestor, who has taken stakes in com­pa­nies such as Sen­tula Min­ing and ELB Group as well as var­i­ous un­listed com­pa­nies.

Ge­orge says the cash in Trans Hex is worth about 330c/share, which is close to what M Cubed paid for its stake, so there is limited down­side.

“We also think there are op­por­tu­ni­ties in the di­a­mond space. Last year was tough for the di­a­mond mar­ket but it is im­prov­ing this year, and we like the qual­ity of Trans Hex’s West Coast Re­sources. Once we are more fa­mil­iar with the com­pany we might want to take a big­ger stake, and that would in­clude dis­cus­sions with other big share­hold­ers.”

Trans Hex’s lat­est ac­qui­si­tion was 40% of De Beers’ Na­maqua­land mines, now called West Coast Re­sources, in part­ner­ship with a con­sor­tium that in­cludes RECM. This year the fo­cus is on ex­plo­ration drilling on the prop­erty and pre­par­ing for full-scale pro­duc­tion, while gen­er­at­ing some cash from treat­ing tail­ings. CEO Llewellyn Del­port warned in the an­nual re­port West Coast Re­sources would make a loss this year.

Ge­orge says so far M Cubed has held only a brief dis­cus­sion with RECM, when it of­fered to buy RECM’s stake and RECM said no. But he be­lieves both M Cubed and RECM are “rea­son­ably prag­matic”. M Cubed likes com­pa­nies where there are a few big share­hold­ers, which TRANS HEX GROUP makes de­ci­sion-mak­ing eas­ier. It would not be in the com­pany’s in­ter­est to have dis­agree­ments among its ma­jor share­hold­ers, he says.

Viljoen says RECM is not con­cerned about the pos­si­bil­ity of dis­agree­ments over strat­egy with M Cubed. “We have spo­ken to them and they share our view that the as­set is un­der­val­ued. There is a lot of value to be ex­tracted there.”

M Cubed picked up a chunk of its shares from Kag­iso As­set Man­age­ment, which has ex­ited com­pletely, its chief in­vest­ment of­fi­cer Gavin Wood con­firms. “We sold on be­half of our clients be­cause we re­ceived what we con­sid­ered a good price given the com­pany’s un­cer­tain prospects and the al­ter­na­tives we have for de­ploy­ing this cap­i­tal. Our clients made a sig­nif­i­cant re­turn on this in­vest­ment as a re­sult.”

In a re­cent re­port, di­a­mond mar­ket an­a­lysts Rapaport said min­ers had a strong first quar­ter but in­ven­to­ries were con­tin­u­ing to in­crease. Al­rosa of Rus­sia, which held 22m carats in in­ven­tory at end-2015, has cut its 2016 pro­duc­tion tar­gets.

On a one to two-year view, Trans Hex cer­tainly has some pos­si­bil­i­ties, rang­ing from a re­cov­ery in di­a­mond prices to in­creased pro­duc­tion from the West Coast mines and a new strat­egy from M Cubed. But it is still more of a hold than a buy, since there are more at­trac­tive al­ter­na­tives, such as Gem Di­a­monds or Di­a­mondCorp.

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