KZG at a diamond in the rough
Progress!
Dear reader
Kazera (Ticker: KZG) launches upwards by a 1/3 today to a £4.7m market cap. KZG’s holding in Deep Blue Minerals (DBM) can now commence mining of diamond sands, with initial processing at Alexkor's Muisvlak plant.
The resulting diamond sands concentrate will be stockpiled and then processed by the Company using a FlowSort, which employs X-Ray technology to identify diamonds. Following this, secure and supervised hand sorting and grading of the diamond output will be conducted before the diamonds are prepared for sale. Ahead of its commissioning, Alexkor required the manufacturer to make several minor adaptations to the FlowSort, which have now been completed.
According to Petra Diamonds latest update the 2Q24 selling price per carat of rough diamonds is $168 revenue per carat. Bear in mind that marine diamonds are generally larger and more valuable. Bear in mind that Petra operate 3 deep mines in South Africa. KZG meanwhile sifts for diamonds.
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 carat at $168 so $1,570 per day (minimum). After costs, the diamond operation could bring in around £0.4m a year (64% to KZG), and more if the capacity is scaled upwards. £0.25m a year isn’t all that exciting, you might be thinking, bear with me reader. This maths will be useful later on. Read on reader, read on!
The real money maker are the Heavy Mineral Sands (HMS). This is a not altogether dissimilar operation on the other side of Africa (in Kenya), where HMS regularly achieves around $600/tonne with a decent margin on costs. But note, reader, this is based on a HM content of 2.4%, and VHM (valuable heavy minerals) of 1.9%.
The VHM is about 10% lower than that of KZG. This is because CREO Design's JORC noted valuable mineral sands (VMS) of Zircon and rutile of 1.2% and 0.92% on the beach, but the ilmenite is 27.54% vs 16% at BSE and Garnet is 30.3%. Eagle-eyed readers will know Garnet’s current price is $190/tonne as set out in my article “POW-lot”.
Kwale is on an approximate 50X larger scale than the nameplate for KZG’s 6,000 tonnes per month HMS operation but with a dramatically (12X) lower quality of ore. Yet the past 12 months they achieved $218m revenue and $102m gross profit.
So the $300k/month gross profit run rate suggested by KZG could be quite conservative (60% to Kazera so $500k/month overall). Is it realistic that 12X more concentrated resources (49.9% concentrations in the surf) pro rata will deliver only 2.5X more profit per tonne than BSE’s Kwale?
Not forgetting diamonds of course.
While KZG’s Whale Head Minerals is not permitted to process diamonds - only HMS. KZG’s Deep Blue Minerals is permitted and these 2 subsidiaries are both majority owned by KZG and can co-operate - and will.
Applying the same logic of 6 carats per 154 tonnes to 6,000 tonnes processed, is a further 233 carats a month of higher quality marine diamonds. That’s a further $40,000 a month (64% of KZG) so after costs a further $250k profit on HMS per year to KZG.
The Hebei debt I calculate at $9.8m (the RNS speaks of “Approaching $10m”).
Valuation
Fixed Assets I estimate at £2m. These were £1,678,000 in the Interim Accounts (31/12/23).
Receivable (Hebei) is now £7.7m.
So NAV of circa £9.7m (i.e. unchanged from 31/12/23)
Using the above numbers:
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
Upside:
The most obvious upside is the capability to scale the Whale Head operation. To process more than 6,000 tonnes a month. After all, Base Resources process 50X that on a beach in Kenya. Moreover separation of minerals will increase revenue.
The 2nd most obvious upside is the plan to rinse and repeat. Dennis Edmonds has spoken of a 2nd site some 60X larger than the current 5 hectares of beach with its estimated 3.1MT of HMS.
The 2.5% Royalty Rate on Aftan. The Arcadian Swanson Mining Project is due to complete in early 2025. I notice they have recruited a mine manager and incentivised him to achieve 12kt a month by April 2025 - 9 months from now.
Monazite is a rich source of Rare Earths. For Base Resources this proved to be the case at its new Toliara Project. A $1bn NPV10 HMS project became a $2bn NPV10 purely through Monazite. We know there is Monazite at Kazera’s HMS operation… it’s the reason for the radiation… and delay!
BSE’s Toliara is 6.66X larger than Whale Head on a Net Present Value basis. However Toliara is discounted at just 10% while Creo discounted Whale Head Minerals project at 20%, so the difference is about 3 times once you discount on an equal basis. It might encourage readers to know that BSE and its Toliara Project was sold recently for A$375m (£191m). Toliara has huge potential but hasn’t even progressed to FID let alone Construction. Whole Head meanwhile is ready to go. Pro rata even using a 6.66X difference that places a £28.7m valuation on Whale Head (i.e. 60% is £17.2m to Kazera)
The Black Economic Empowerment Partners. An interesting fact is that while these own 30% of Whale Head and 26% of Deep Blue, they need to pay for that holding, they don’t get it for free. The agreement is a quarter of earnings go to BEE and three quarters go to KZG to pay for the 26% holding. So in effect, KZG actually enjoy about 84% of the CASH earnings from Deep Blue.
And in the event of a £28.7m sale then the 26% share would generate a £5.6m payment from the BEE to KZG.
Conclusion:
Even applying some pretty conservative numbers, today’s increase leaves KZG looking incredibly cheap.
The delay in getting sign off has been immensely frustrating, but the monies from Hebei cushioned Kazera, and afforded a build out of two operations, one which has had the go ahead and the other which will be ready to commence once the nuclear regulator allows. Today’s RNS suggests that that is now imminent.
Regards,
The Oak Bloke.
Disclaimers:
This is not advice
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