Bigger slices for KZG-stanies
More good news from Kazera
Dear reader,
8 days! I hear you cry. It’s only 8 days ago you wrote about Kazera, why are you writing again so soon.
Ah, dear reader, developments, and I felt compelled to write about today’s news. I was delighted to see today’s news. After all, it’s not every day you sell something for $0.15m and 2.6% dilution that’s worth much more.
They do say a bird in the hand is worth two in the bush. Or ten.
Let’s consider the dilution. On a fully diluted basis there are 995,799,523 KZG shares. With 27,110,947 new shares issued to Tectonic makes 1,022,910,470 KZG shares.
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Before:
WhaleHead Minerals (WHM) 60% NPV20 of $150m = $90m
Deep Blue Minerals (DBM) 64% NPV20 of $10m = $6.4m
BEE repayment of loans in DBM (of 26% of DBM) = $2.4m
Debtor Aftan = $9.7m
Total: (Excluding Aftan’s 2.5% NSR) = $108.5m
After:
WHM 70% NPV20 of $150m = $105m
DBM 74% NPV20 of $10m = $7.4m
BEE repayment of loans in DBM (of 26% of DBM) = $2.4m
BEE repayment of loans in WHM (of 30% of WHM) = $45m
Debtor Aftan = $9.7m
Total (Excluding Aftan NSR) = $169.5m
Less Cash -$0.15m
Less 2.6% dilution of the above valued at $169.5m = -$4.4m
Theoretical Gain $169.5m - $108.5m = $61m gain.
And how did the market react so such amazing news? No change.
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The reality of course is that the stuff needs digging out of the ground. Grand numbers and an apparent “no brainer” is all well and good but what about the Bear Case.
Is the resource real?
Yes, 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.
What’s more down the coast ASX listed Mineral Commodities had 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 the beach has a 5.8% concentration whereas KZG has a resource with 49.9% concentration.
6,000 tonnes at $40 margin is $240k a month margin. Dennis spoke of $300k margin.
Is the operation real?
It’s dormant and awaiting approval but the diggers, the pan plant, the spiral and so on are all there. The set up is not dissimilar to the pictures at Tormin so unless there is an elaborate hoax set up, the operation is real.
Are the Diamonds going to make any money?
Currently diamonds are fetching lower prices it’s true. Plus Alexkor take a 40% cut.
The positives however are (if you’ve ever actually bought or sold diamonds) is that there’s a world of difference between the valuation according to the 4 C’s -colour, clarity, cut and carat. Marine diamonds tend to be of a higher quality.
Also a number of deep mines are being mothballed. So supply is contracting. Lab-grown diamonds are seen as a threat. However a single carat requires 300KWh of energy so $200-$500 per carat production cost. Then any margin and profit on top. Diamond labs don’t make diamonds for free. Sifting for diamonds in sand, comparably, is a reasonably cheap cost of production. In my article “diamond in the rough” my estimate was a selling price of $168 per carat. 40% to Alexcor implies $280 selling price.
So marine diamonds per carat compared to lab grown are certainly (very) competitive and potentially the margin is higher. Taking $350/carat as a reasonable mid point would deliver a £0.55m gross profit per year from Inland with £0.3m from Marine diamonds.
That roughly covers all KZG costs, and means a net profit of around zero.
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In the prior article I concluded the valuation of WHM and DBM once in operation looked like this.
Deep Blue (Diamonds) profit run rate: £0.25m + £0.2m
Whale Head (HMS) profit run rate: £2.8m
£3.25m Gross Profit ~ £2.25m Net Profit
On a paltry 6X earnings that’s £13.5m which is 3X today’s share price. Plus the £7.7m receivable.
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Today, once you include the additional share of 10% WHM, 10% DBM, and net 22.5% (of the 30% of the BEE share of WHM)** (NB: the repayment is based on 75% of cash revenue is used for repayment and 25% is paid over to the BEE)
DBM profit run rate £0.85m + £0.1m = £0.95m
WHM profit run rate £2.8m + £0.5m + £1m* = £4.3m
*at £1m/year the £45m debt is payable over 45 years.
= £5.25m Gross Profit ~ £4.25m Net Profit
On a 6X P/E £25.5m + £7.7m receivable = £33.2m valuation (versus today’s £3.75m market cap)
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If the markets were logical, and if you agree with the logic of what I write then today’s deal is worth an additional £12m
That’s before all the upsides I spoke about in Diamond in the Rough.
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Ah hah you might say earlier on you said a $61m increase, and now you say a £12m increase. Why the difference?
Good question. Well £12m is the value of here and now - or at least soon to be here and now - once that regulator finishes their regulating, and Alexcor sign off the changes.
$61m is based on a “life of mine” value. In other words the NPV of $150m for Whale Head assumes more than a 6,000 tonnes per month run rate. 6,000 is 0.072Mtpa.
Versus Mineral Commodities Inc. who process 2.7Mtpa and are expanding to 3.9Mtpa
Of course there could be upsides even beyond that $150m and $61m gain. A discount rate of 20% is extremely harsh for an operation which is funded, physically built and ready to go. 20% discount rate four years ago when this was just a dream.
Today it is tantalisingly close to reality.
Regards,
The Oak Bloke.
Disclaimers:
This is not advice
Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip".
A real "gem" you have identified Oak. Good piece (as always). Glad you made some money here although I think that this remains totally undervalued. Directors obviously think so given their recent buying. One to tuck away in the bottom drawer