Asi es perfecto - Kazera Kazera
Kazera shaking its hips with a 131% YTD performance
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Dear reader,
Delighted to see a massive result from Kazera yesterday on news of the offtake agreement.
This is now the OB 2024 3rd double bagger during the 2024 year, and only double bagger as of 14th December, at the time of writing.
For a “sucker stock” dismissed as speculative and now described as “turnaround” (despite there being no fundamental difference to the opportunity 12 months on) which I nevertheless backed despite the negative connotations. Sometimes the wait was frustrating but I leant into the idea. Patience was rewarded. In spades…. of heavy mineral sands.
Was it high risk? There was the risk of getting the mining permit of course, and a year ago the South African special forces were involved! In article 120 we learned the South African government has brought in their Special Forces - The Recces (the SA equivalent of the SAS) to the area and “things were changing” according to the KZG CEO though at one point, he continued, it was “like the Wild West”. 100 soldiers were stationed at KZG’s site tracking down illegal miners and traders.
My calculated risk was given this mine was right on the South African border and right in the government-controlled diamond district (Alexcor) - so I felt there was no way the South Africans would let the bad people run run riot - and they didn’t.
I’m reminded of my past calculations. Even after the 38% jump in the share price KZG is only a £15m market cap.
“ONLY”?!
My estimates of the core business of a $4.8m operation was based on higher diamond prices than today, and the demise of diamonds has been much talked about.
What’s more Hebei paid $4.4m (£3.5m) of an agreed $13m plus interest which today is $9.5m (£7.5m) owed and is being pursued through the courts and arbitration.
Let’s do the maths:
In fact a 2020 Feasibility Study for one of the mining blocks allocated to DBM, which resulted in an ascribed inferred resource of 208,000 carats at a bottom cut-off aperture size of 1.6 mm at a grade of 6.0 ct/100m3. Areas closer the beach have a higher grade than this (due to reduced overburden) and marine diamonds are a better quality.
Let’s do the maths. A cubic metre of sand is 1.54 tonnes, so 6 carats per 154 tonnes is 25.7 tonnes per carat. KZG’s equipment processes 20 tonnes per hour capacity, so over a 12 hour shift that’s 240 tonnes of sand and 9.3 carats at $127 per Ct so $1,570 per day (minimum). After costs, the diamond operation could bring in around £0.4m a year
Petra (ticker PDL) mines industrial diamonds and these are up 10% at $126/ct, while Gem Diamonds (ticker GEMD) reports higher prices of $1603 for its diamonds - up over 10%.
According to the 2020 Feasibility Study by Stellenbosch-based geological and CIS consultants CREO Design (Pty) Ltd in the format of a Technical Economic Evaluation of WHM’s mining prospect at Walviskop in December 2020.
It was based on the then current resource of 3.11 million tons at a grade of 62.1% Total Heavy Minerals and 61.2% Valuable Heavy Minerals (dominated by garnet (30.29% of Run of Mine (ROM) and Ilmenite (27.54% of ROM) – some of the highest grades known globally. Zircon and rutile (0.92%) accounted for 1.2% and 0.92% of ROM respectively but were not included in this study due to their negligible contribution and a high capital cost to separate. A mineral reserve was defined from the resource.
If I plug in the evidence I arrive to a $118 per hour revenue.
These numbers assume ALL marine diamonds are only as good as the stuff coming out of PDL’s mine - industrial/generic - no gemstones. If they were as good as GEMD’s diamonds then we’re talking x10 $4.88. That’s a 40% increase to the numbers - and profit.
These numbers also assume that KZG are separating the minerals and today they aren’t but have said that’s the next step - either via magnetism or electrostatic which I thought was interesting.
Anyway let’s turn this into a monthly operation. 3 blokes (I’m going to make that gender assumption, sorry) at $10 per hour and a fourth at $20 per hour, electricity and depreciation of $10 per hour makes a cost of sale of $60 per hour. Based on 12 hours a day, 30 days a month that’s $0.85m less $0.43m makes $0.42m. Assuming a £1.6m overhead (much higher than before) the net profit is £2.3m, putting this on a P/E of 6 and generating about $0.5m of cash per month.
£2.3m per annum net profit. That’s lower than my prior £3.8m assessment.
Well, a couple of reasons for that:
Aftan - see the next section
Diamonds fell in price but are now increasing again.
Lab-grown diamonds are seen as a threat. However a single carat requires 300KWh of energy to produce so that’s a $200-$500 per carat energy cost. Then profit and other production and supply costs on top. Diamond labs don’t make diamonds for free. Sifting for diamonds in the sand, comparably, is a cheaper cost of production.
No Inland Diamond operation is included in my numbers due to waiting for the government body Alexkor signing off the plant - KZG tell us they are now scaling up production. So £2.3m would be plus this and my prior estimate of £0.6m per annum still feels reasonable.
AFTAN:
I previously assumed 2.5% royalties from Aftan. I still believe that will come. But perhaps not from HeBei. It seems HeBei HAS got heebee jeebies after all. That, or they’ve run out of cash. The next door neighbours - the Arcadians are probably quite happy. They did a deal with Hebei too, and Hebei have practically built and equipped the Swanson mine ($10m cost) in return for a 50% stake. But if they can’t follow through then these lose their 50%. Now the Arcadians will need to agree debt or equity funding for the proportion remaining of that $10m, but the upside for them is that they get to keep 100% of the proceeds from the mine - a 25.4% IRR on the basis of a $10m construction cost. The IRR will be close to 30% because of Hebei’s sunk cost.
The Arcadians appear to be the obvious buyer for Aftan.
Their mine is a few months away from completion.
Back to Heavy Mineral Sands
What if they install a 2nd trommel? Process 40 TPH instead of 20? Profits rapidly grow to nearly £5m a year.
What if the diamonds are $1,260 a carat (after Alexkor’s share) instead of $126?
Profit before tax grows to over £10m a year.
So £2.3m feels like a base line rather than an outcome.
Another concept I wanted to explore was what does the 3.11 million tonnes JORC look like? The answer is about $500m of revenue (undiscounted). But factor in the wave replenishment and you can get to several billion; include Perdevlei and the theoretical is vast.
At this point people could scoff at the idea of a £15m market cap having a theoretical resource worth $88bn of revenue, but let’s consider KZG’s peers.
#1 - ASX listed Mineral Commodities
Down the coast from KZG is ASX listed Mineral Commodities which has a similar size resource (2.7 million tons) and have mined over 5 times that to date.
Where they are proving to be able to generate $15-$40 per ton of HMS. Bear in mind this is after they’ve mined for years and extracted 5X the expected total resources and yet the magic porridge pot is still yielding.
Also bear in mind that their beach has a 5.8% concentration whereas KZG has a resource with 49.9% concentration. They have no licence to mine diamonds remember, too. My own $162/tonne calculation could be quite conservative on this basis.
6,000 tonnes at $40 margin is a $240k a month gross margin. Dennis spoke of a $300k per month margin, at first (excluding diamonds) and excluding any separation.
#2 Iluka
A $2.2bn market cap. Has 4.7% grades of HMS. Yet achieve an EBITDA margin of 53%. KZG has a 49.9% grade vs Iluka’s 4.7%.
#3 Chilwa
A $60m market cap. Chilwa has 3.9% HMS content. Because "There has been a global underinvestment in heavy mineral sands projects over the past decade." Nice to hear. Remember KZG has 49.9%.
#4 Image Resources
A $104m market cap. "flagged an updated ore reserve at Atlas of 5.5Mt at 9.4 per cent total heavy minerals,". 9.4%? Nice but KZG is 49.9%.
#5 Base Resources
Sold for $177m to Energy Fuels (UUUU).
This mine is now exhausted but back in 2023 the mine looked like this: "The heavy mineral (HM) grade of ore mined in the quarter was lower at 3.0% (last quarter: 3.9%) due to the lower grades associated with the North Dune. 3%? KZG is 49.9%
#6 Kenmare
A £300m market cap producing 335kt a quarter (vs KZG’s initial 18kt a quarter)
Grade for the 3Q24 quarter was 3.8%. Which generated $155m of sales in a quarter ($0.6bn per year) and an EBITDA of $63.2m at a 41% margin. PAT $21m down 69% y-o-y. Kenmare generates a 7.4% yield dividend.
But a 3.8% grade? KZG has 49.9% + Diamonds.
A Marketing & Distribution Agremeent is signed
KZG have signed with a distribution agreement with mineral trading co Fujax. As part of that some upfront working capital was negotiated too.
Agreement for WHM to sell an initial 100,000 dry tonnes of HMS in monthly lots of circa 6,000 tonnes, with first sales expected to commence by March 2025.
· WHM will be paid 80% of the anticipated final sales price (less costs) within 5 days of the HMS being delivered to the mine gate.
· The balance of the sales price, less costs (including a marketing fee payable to Fujax) shall be paid to WHM within 5 days of the final sale of the product.
· Fujax will be responsible for, and shall carry all the costs of, transporting, processing assaying and selling the HMS, together with paying all taxes, levies, duties, custom clearance, loading and other charges.
· Fujax will prepay WHM US$600,000 in two equal tranches in December 2024 and January 2025.
Conclusion
The read across to KZG’ peers is positive. The 34X beach is a huge positive. The additional opportunity for diamonds is certainly positive. Wave action is positive. The progress at the nearby Arcadian Tantalum/Lithium mine and the update about Hebei can be seen a positive too.
Even now on a £15m market cap, Kazera is still very cheap. As much as I love my 2025 ideas there’s no way I’m selling KZG - there’s plenty more to come from Kazera in 2025.
By the way, if you dislike Shakira’s music then I challenge you to listen to her early music before she went mainstream. An incredible voice, a great guitarist and a lively imagination. Of course a talented dancer. You would not really know the extent of her talent from her later music. I remember discovering Shakira travelling in Latin America back in the year 2000 but that’s another tale for another time.
Regards
The Oak Bloke.
Disclaimers:
This is not advice - you make your own investment decisions.
Micro cap and Nano cap holdings including those held in a Fund might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"