It’s not exactly clear-cut
Scepticism lingers after Namibian investment company expands into diamond industry
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.