How PDF avoids the pitfalls

Source: Stock Market Digital

Date :26/09/2007 16:55:18

Pangea DiamondFields Plc,an emerging mid-tier diamond producer and exploration company, speak out about its risk minimising strategy.

Written by James Hurley & Produced by Alex Smith

Pangea DiamondFields (PDF) was established in its current format in 2005 with the merging of the diamond assets of Efidium and Dorado. These assets are now at various stages of exploration and development, ranging from early exploration through bulk sampling to a project in Angola which is at pilot mining stage.

Since 2003, PDF has established a solid operational base with a total of 26 professionals stationed at project sites and in regional offices located in Bangui, Kinshasa, Johannesburg and Luanda.

The company’s projects are all located in highly prospective diamond-bearing geological environments in the Central African Republic (CAR), Democratic Republic of the Congo (DRC), South Africa and Angola.

Raising capital

While the current incarnation of the company is only two years old, it benefits from a strong Board of Directors, boasting broad experience in mining exploration and production around the world.

“The principals of the Pangea Group have been together for twenty years,” says Brett Thompson, the company’s COO. “They have been involved with a number of different operations and commodities throughout Africa.”

Thompson, although relatively new to the Group, has extensive experience in both underground and open pit mining of kimberlite and alluvial deposits and has worked with a number of diamond mines in South Africa including a role as Assistant General Manager for De Beers’ Kimberley mines.

He was later appointed as Chief Operating Officer of Energem Mining where he was accountable for the executive management of all aspects of Energem’s diamond mining operations and exploration activities internationally in Sierra Leone, CAR and Angola.

“Approximately four years ago, the principles got together after projects in Mozambique, Tanzania and South Africa and decided to try their hands at diamonds. The rationale was that the supply-demand deficit in the current market meant that it’s not a bad place to be going forward,” he explains.

The group developed a portfolio, and Thompson was recruited in May 2006 to oversee the operational aspects of packaging these projects together and listing Pangea DiamondFields on AIM.

The listing, which took place in October 2006, raised £15.9 million through the placing of 26.5 million ordinary shares, giving the company a market capitalisation at placing of approximately £70.2 million.

It’s a new kind of role for Thompson. “In the mining industry, one has exposure to the various processes, on the processing, earth moving side to the basic managerial side. Diamonds are a little different, and particularly with the role that I’m in – it’s not only the physical side of mines and mining, it’s also a case of marketing and showing the product, which isn’t really something that I’ve had a great exposure to before,” he says.

Mitigating risk

The African continent is responsible for over 76 percent of global diamond production by value. In addition, geologically highly prospective countries for diamond exploration such as Angola, the DRC and the CAR have recently undergone significant positive political, social and fiscal changes. As a consequence, the company is concentrating its diamond exploration efforts within Africa and specifically within these countries.

Diamond mining remains a potentially risky business, but PDF has a strategy that mitigates this risk, focusing on projects that can yield high margins. “We’ve spread the political risk over a number of different countries and a number of different projects, so that we have a number of potential resource areas.

We’re busy in four different countries, and we generally look to mitigate risk by expanding or risking capital on an incremental basis depending on confidence in a project.”

Thompson explains the principle. “To kick off a project, PDF may go in at the exploration stage and spend up to say $500,000. We’d then need a fair amount of confidence in the resource in the ground to pay back the investment in a subsequent bulk sampling operation, which could cost in the region of $3.5 million, depending on where we are.

"Beyond that – and that would last around one year – we’d upscale, spending another couple of million of dollars, and if that looks good we’d upgrade again to a full scale mining module, which is essentially a mine in its own right. Depending on the size of the resource, we could look to duplicate that module in different areas.

“From a political risk perspective, our combined experiences across Africa have made us aware of the possible pitfalls. But we’re comfortable at the moment that the areas in which we are working are relatively safe, and we have good relationships with the various ministries of mines and the governments. That’s not to say there aren’t risks, but the risks are well mitigated,” he says.

Alluvial diamonds

Another central component of PDF’s strategy for swift growth with managed risk is its concentration on alluvial diamonds, which involves the recovery of diamonds from current and historic river beds, sea or seashores, also referred to as "wet" mining. Alluvial projects have short development and capital payback periods, thereby reducing risks on capital.

This allows PDF to operate a lean and moveable operation; the company is developing a limited number of economically viable projects (by modular and incremental production rate increases) into mining operations, thereby limiting large initial capital outlays. Projects not meeting the evaluation criteria at the end of each stage are no longer pursued and the equipment is transferred to another project.

“With alluvial diamonds, the resource generally tends to be spread over a large area but has a limited vertical extent, so you can’t have a massive mining and treatment facility in one location. You’re more likely to have a number of satellite treatment facilities over a larger area,” says Brett Thompson. The company currently has 25 distinct resource target areas.

“We are able to pick and choose between our alluvial operations. We’re looking for high margin resources that are relatively cheap to develop, operate and when exhausted, relocate resources to other areas. Most of the equipment that we use is mobile in nature and in the event that a particular operation no longer provides an economic benefit, we can soon move that equipment elsewhere.”

Current major projects that Thompson says are looking “very promising” include Dimbi in southern CAR and Longatshimo River in the DRC.

“I think it’s fair to say that we’re happy with the Angolan operation at the moment. It’s producing particularly well and we’re already working on opportunities for organic growth with the equipment that we already have on hand to improve capacity there. We’d like to get our Dimbi project diamonds to market as soon as we can so we can get a good indication of the average value per carat for that resource and we can look to expand that project in the near future as well.”

In DRC, the company has increased the critical mass of its Tshikapa project to the point where it has split it into two projects which are both progressing particularly well. “We’re putting together a portfolio of additional properties complimentary to our existing holdings along the Tshikapa and Longatshimo Rivers in areas that we think are particularly prospective.”

The company’s South African projects – PDF is busy bulk sampling at Harts River and Bakerville and Bloemhof is at an advanced exploration stage – are all located a few hours drive from Johannesburg, a factor which makes the country an easier territory to explore and develop. “The success of any one of our current ten projects will more than underpin our current market capitalization,” he says.

A buoyant industry

The outlook for the diamond sector is very positive. As global production remains constant and demand continues to increase, a shortage of rough supply is forecast over the next ten years. This will result in a favourable market for at least five years for any company bringing successful new projects on stream. While the market will correct at some point and some decrease in rough prices may occur at this stage, much of the recent gains would have become entrenched into the market by then.

“At the moment, the industry cannot supply the expectations of the market. That’s particularly so for the higher end, gem quality goods which are our focus. Prices will be increasing and good projects will be valued by both trade buyers and the stock markets.”

While a downturn in the world markets and the resultant change in spending patterns may hit the luxury goods industry, Thompson says this isn’t a “major issue in the short term,” particularly given the supply and demand equation and the niche that the company works within.

A more pressing restricting factor is the current weakness of the US dollar. “Our costs are mostly based in South Africa’s local currency – the rand – but the diamonds are obviously sold in dollars, so that hurts us a little bit. A weaker rand or stronger dollar would be beneficial, but we’re aware of the foreign exchange risks and we ensure that we mitigate those risks by high margin projects. We can chop and change between projects and put them on ice until economic conditions improve,” says Thompson.

“The view that most analysts subscribe to is that there is a growing supply and demand gap. There will probably be a price correction – in fact, there have already been several in recent months – but that has been on the smaller stones and on lesser quality goods, so we’re in a very promising position going forward.”

Related Links

Pangean DiamondFields