It’s not ex­actly clear-cut

Scep­ti­cism lingers af­ter Namib­ian in­vest­ment com­pany ex­pands into di­a­mond in­dus­try

Financial Mail - - MONEY&INVESTING - Marc Hasen­fuss hasen­fussm@fm.co.za

Share­hold­ers in Namib­ian in­vest­ment com­pany Trustco might be for­given for toss­ing back a few seda­tives over the past few weeks.

Sen­ti­ment for the shares has ei­ther been de­spair­ing or eu­phoric — they sank to 380c in mid-au­gust, re­bounded to 459c at the end of that month and skulked down to 382c at the start of Septem­ber, only to re­cover to 460c at the time of writ­ing.

The Fi­nan­cial Mail reck­ons Trustco’s re­cently re­leased an­nual re­port could well be open to very dif­fer­ent in­ter­pre­ta­tion by the mar­ket.

From the out­set, one can­not fault the com­pany’s ef­fort to en­gage with its share­hold­ers, es­pe­cially with the com­pre­hen­sive over­view of its re­cent thrust into the di­a­mond min­ing sec­tor through the ac­qui­si­tion of

Huso In­vest­ments — in­clud­ing a min­ing project owned by North­ern

Namibia De­vel­op­ment

Com­pany (NNDC), cou­pled with di­a­mond pol­ish­ing op­er­a­tions un­der the

Morse ban­ner — as well as

51% of Meya Min­ing in

Sierra Leone.

The move into min­ing has largely di­vided the mar­ket on Trustco, which un­til re­cently re­volved op­er­a­tionally around spe­cial­ist fi­nan­cial ser­vices and prop­erty. More con­tro­ver­sial, how­ever, was the R3.6bn price tag at­tached to the Huso di­a­mond min­ing and pol­ish­ing as­sets — es­pe­cially as the as­sets will be bought from Trustco MD, founder and main share­holder Quin­ton van Rooyen in a stag­gered scrip-funded deal.

At the rul­ing share price Trustco is trad­ing on a trail­ing earn­ings mul­ti­ple of just six times — a rat­ing that be­trays a cer­tain scep­ti­cism around prospects and strat­egy. While head­line earn­ings came in at about 70c/share and af­ter-tax prof­its at R147m for the year to end-march, the net cash flow from op­er­a­tions was neg­a­tive to the tune of R73m. What is also eye-catch­ing is that de­spite the huge dol­lop of prof­its re­flected in Trustco’s in­come state­ment, the tax bill was less than R1m (and only R8m in the pre­vi­ous fi­nan­cial year).

In his open­ing re­marks in the an­nual re­port, Van Rooyen ar­gues that “see­ing things from a dif­fer­ent per­spec­tive is a power. Trust­ing those who see things dif­fer­ently is the re­ward. You know, Trustco-like.”

This quote may well ap­ply to the com­pany’s sud­den veer­ing into the min­ing in­dus­try.

The much-mooted min­ing ven­tures are still at an em­bry­onic phase and, as far as the Fi­nan­cial Mail can as­cer­tain, the min­ing as­sets in Huso have (at the time of writ­ing) still not been granted the nec­es­sary min­ing li­cence.

The an­nual re­port states the ob­vi­ous: “The fi­nal­i­sa­tion of the Huso trans­ac­tion is cru­cial to the ul­ti­mate prof­itabil­ity of the re­sources seg­ment.” It adds that the board has no rea­son to be­lieve the min­ing li­cence should not be is­sued by the min­istry of mines.

Not sur­pris­ingly, Van Rooyen is still en­thu­si­as­ti­cally punt­ing the di­a­mond tilt.

“Our new re­sources seg­ment flexed its mus­cles and worked to­wards set­ting up the Meya mine in Sierra Leone,” he says. He ar­gues that the larger part of value cre­ation in the min­ing seg­ment will be re­alised through the di­a­mond cut­ting and pol­ish­ing fac­tory. In the mean­time, fur­ther cap­i­tal ex­pen­di­ture has been com­mit­ted by the NNDC board “as it has no rea­son to doubt the very com­plex ge­o­log­i­cal and eco­nomic po­ten­tial of the re­source”.

Trustco op­ti­mists will no doubt also take much heart from the an­nual re­port’s high­light­ing of the di­a­mond re­sources state­ment and com­pli­ant val­u­a­tion.

The re­port notes that in­de­pen­dent ex­pert Paul Austin of Ef­fort­less Cor­po­rate Fi­nance not only deemed the Huso trans­ac­tion “fair”, but con­tended that the price tag of R3.6bn is 38.1% be­low the val­u­a­tion of R6.5bn — “which he be­lieves is the value of the Huso trans­ac­tion”.

To of­fer much-needed con­text for th­ese eye­brow rais­ing num­bers, a R6.5bn val­u­a­tion for Huso is al­most dou­ble Trustco’s R3.5bn mar­ket cap­i­tal­i­sa­tion. Such a dis­par­ity raises ques­tions, the most im­por­tant of which is whether the mar­ket is jus­ti­fied in its scep­ti­cism. Un­for­tu­nately, only time will tell.

With the min­ing li­cence still out­stand­ing, it is dif­fi­cult to pen­cil in a timetable for Huso’s push for full pro­duc­tion. The an­nual re­port does, how­ever, show an ex­plo­ration ta­ble from April 2016 to end-march this year that might of­fer the most tan­gi­ble ev­i­dence of whether R3.6bn is a jus­ti­fied price tag.

The planned pro­duc­tion tar­gets dur­ing the ex­plo­ration phase set an an­nual tar­get of 367,567 t, an av­er­age of 30,630 t/month. But the ac­tual ton­nage mined came in well short of the tar­get at 109,413 t, or 9,117 t/month.

Per­haps of more con­cern to share­hold­ers is that Huso also fell well short in terms of stones re­cov­ered and carats. A tar­get of 71,123 stones and 9,243 carats was set for the year to end­march, but the re­al­ity was that only 5,743 stones were re­cov­ered for just 700 carats (about 58 carats/month).

The one small com­fort is that for five months of pro­duc­tion, Huso achieved the stone size tar­get of 0.13 carats.

Ad­mit­tedly, th­ese are early days for Huso — but for a project with an in­ferred value that is about seven times larger than the mar­ket cap­i­tal­i­sa­tion of the en­tire di­a­mond min­ing board of the JSE, this is an omi­nously un­der­whelm­ing start.

Of­fi­cially, the an­nual re­port does recog­nise that NNDC’S ac­tual per­for­mance fell short of its fore­casts — but it coun­ters that pro­duc­tion was mostly con­fined to the shal­low gravel ar­eas due to the treat­ment plant con­fig­u­ra­tion and lim­i­ta­tions. Cut­ting through the tech­ni­cal data, it does ap­pear that there are some chal­lenges to lib­er­at­ing di­a­monds, and mod­i­fi­ca­tions to the ex­ist­ing treat­ment plant are planned at a cost of R29m.

Th­ese flawed pre­lim­i­nar­ies at Huso, cou­pled with a bizarre sit­u­a­tion in which the min­ing li­cence has still not been granted more than two years af­ter the trans­ac­tion was first de­tailed, sug­gest it may be some time be­fore the veil of scep­ti­cism lifts.

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