The fi­nal glim­mer

Finweek English Edition - - INSIDE - David McKay

South Africa’s com­mer­cial pedi­gree may par­tially rest on the past deeds of its di­a­mond in­dus­try, but over the last 10 years the sec­tor has pro­vided a mixed bag for in­vestors. When all’s said and done, di­a­mond min­ing is tough work, and re­sources are dry­ing up. It hasn’t been a happy hunt­ing ground.

De Beers has sold most of its mines to Pe­tra Di­a­monds, a UK-listed firm that has made a good fist of its en­deav­ours. How­ever, di­a­mond ex­plo­ration firm, Thabex, was re­cently forced off the JSE while Di­a­mond­Corp (Toronto and JSE), GEM Di­a­monds (Lon­don), and Rock­well (Toronto and JSE) have had their ups and downs. It’s not a sec­tor brim­ming with suc­cess sto­ries.

En­ter mar­ket con­trar­ian Piet Viljoen, whose in­ter­est in Trans Hex, a com­pany in which his RE:CM has about 25%, stems back to 2007. Even then, while the min­ing boom was in full swing, Viljoen was ex­press­ing his in­ter­est in buy­ing stocks that did not gen­er­ate any good news.

At the time, Trans Hex was hav­ing its nose blood­ied in An­gola, where it was hop­ing to ex­pand while mak­ing the best of de­plet­ing al­lu­vial re­sources lo­cated in the Or­ange River in the North­ern Cape.

Viljoen, how­ever, says that the com­pany has rewarded RE:CM clients hand­somely. If you were able to buy 100% of the com­pany – cur­rently worth R371m on the JSE – it would pro­vide you with free cash f low of R40m ev­ery year, equal to an an­nual yield of about 10% to 11%.

“It’s a good in­vest­ment. There is hard net as­set value of R5/share in there, cash of R4/share, and free cash f low equal to 30c to 40c/share. It’s a small com­pany, not recog­nised, but we’re very happy,” says Viljoen.

The share is cur­rently trad­ing at R3.35/ share, up about 13% over the last year. “At some point in time, it will be recog­nised, but I don’t watch the share,” he says.

The share has been held back by delays to a pro­posed trans­ac­tion in which Trans Hex’s 50%-held Emer­ald Pan­ther In­vest­ments is to buy De Beers’ stake in Na­maqua­land Mines for a re­vised sum of R166m (R83m at­trib­ut­able to Trans Hex).

A re­cal­cu­la­tion on De Beers’ en­vi­ron­men­tal li­a­bil­i­ties, and Govern­ment per­mit­ting mean that even if Trans Hex com­pletes the deal as an­tic­i­pated in the third quar­ter of the cal­en­dar year (around this time of year), the deal will have taken three long years to con­sum­mate.

In his nor­mal un­com­pro­mis­ing style, Llewellyn Del­port, Trans Hex’s CEO, has de­scribed the process as “tor­ture”. Re­fresh­ingly, Del­port has re­fused to reach for the rose-tinted glasses when talk­ing about his own com­pany.

Says Viljoen: “Llewellyn doesn’t talk a good game but he man­ages the com­pany ex­tremely well. It’s a tight-run ship.”

One of the other ma­jor share­hold­ers in Trans Hex is Northam Plat­inum fol­low­ing the un­bundling of shares in Mve­laphanda Re­sources to its share­hold­ers. Al­though it seems odd for Northam to have the ex­po­sure, there is no chance of it sell­ing, thus no over­hang.

“Our Trans Hex stake is small but we think the com­pany has got a good fu­ture and we think the share price will go higher,” said Northam Plantinum CEO Glyn Lewis at the com­pany’s re­cent full-year re­sults pre­sen­ta­tion.

“I would be sur­prised if there is any share­holder in Trans Hex who knows what’s go­ing on who would be a seller of the share,” says Viljoen.

Llewellyn Del­port

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