By Dr. Michael Green
It looks like rapid progress is now being made across each of Kazera’s operations. This morning investors were served up a real treat with news that the company is on the verge of a material uplift in diamond production, cash flow and the profitability thereof of its diamond operations.
In a nutshell, the throughput at the Muisvlak Diamond Processing Plant, which the company currently uses for its diamond mining activities at Alexander Bay, South Africa, is in the midst of seeing its throughput increased six-fold. In the past, Kazera’s diamond production has been limited by the low throughput of this plant. All that is about to be resolved by the investment in a number of plant upgrades.
In order to make this happen, Kazera has established a joint venture with MV FIVE (Pty) Ltd (MV5), a company representing the local community. This deal will see the JV taking over control of the Muisvlak Diamond Processing Plant as part of a 5-year contract.
As a result of the MV5/KZG JV deal, the throughput at the plant is expected to increase to 35,000 tons of gravel per month, significantly increasing the amount of gravel Kazera can process from its activities at Alexander Bay. There will be no hanging around here as the plant is anticipated to become operational by 1st October 2021 and from that time it is expected to be generating revenues for the MV5/Kazera joint venture as contractors will incur a fee per ton of gravels processed. Profits from the joint venture, which will come from other operators utilising the plant, will be split on a 30:70 basis in Kazera’s favour.
MV5 will operate the processing plant for an initial period of five years as well as having a further five-year extension option with the agreement of all parties. The plant was commissioned in 2013 at a cost of c.£6 million and has the capacity to process up to 150 ton per hour of gravel. Moving ahead the plan is that it will be run on two 10 hour shifts a day to achieve a monthly throughput of 35,000 tones of gravel.
MV5 will also have the right to co-ordinate mining activities in the Southern region of the Alexander Bay mining area. As the announcement this morning has highlighted, the management of the plant will also give the MV5/Kazera joint venture access to a mining area which contains over 400,000 carats of diamonds. It has got to be realised that this processing plant will also provide an established base for the mining of Heavy Mineral Sands (HMS).
Getting the productivity of the processing plant up will allow the company’s SA subsidiary Deep Blue and other contractors to process the vast stockpiles of gravel that they have accumulated over the past year and to realise the value of the diamonds contained therein. It will also allow Deep Blue to ensure that, in the future, all gravel mined by it in a mining cycle is processed and ready for final sorting during that cycle. Important news indeed.
At the time, Dennis Edmonds, Joint CEO was able to point out that “We have been severely constrained in the past due to our inability to process the thousands of tons of gravel that the team in South Africa have been producing on a monthly basis. This joint venture has the potential to provide a potential six-fold increase in diamonds produced, which will create a significant profit for the Company. It is reflective of the high regard in which our team in South Africa is held, as well as of the commitment of both Alexkor and the local community to working together to achieve a stable and profitable environment for mining contractors and the wider community.”
At the same time, all the pieces are now really in place for profitable tantalum production to begin, now that an offtake deal has been sorted. We have never had any doubts about the quality of the asset, which is a demonstrably high-grade tantalum project in Namibia. But the strategy of bringing the mine back into production using borehole water and benefiting from improved water retention techniques – is set to produce a decent cash flow within months. Ok, it will be a lot better when the 13km pipeline from the Orange River goes in, but that will take a while once the big funding comes in. All this is happening with exquisite timing in our view, given the growing importance of tantalum in the manufacture of many personal electronic devices such as smartphones. As last week’s announcement also made clear, Kazera’s offtaker also has an interest in the lithium that the Namibian mine has in copious quantities and is one of the world’s hottest REM’s right now and set to remain so with the continuing move towards global electricifation.
It is not hard to get excited about Kazera. The real impact is that the company is expecting to start generating profits from not one but two different sources before the end of this year. That is not to mention the enormous potential which is represented by the HMS project where apparently the permit is expected to be received in the very near term now. This will be, in its own right a company maker and capable of supporting a market cap multiples of the current derisory one we believe. On top of all this is the interest being shown by Namibian investors and that was reconfirmed just recently as remaining solid with the expectation of completion also in the near term.
We initiated coverage on Kazera with a Conviction Buy stance in early August 2020 at 0.70p with a target price of 2.50p. We are seeing swiftly changing fortunes at the diamond and the tantalum plays, even ahead of the big potential investment that is coming Kazera’s way. Plus, the alluring potential of the HMS does mean that we will probably soon be doing a full update note where we will be revisiting our target price for the stock, which we make clear is currently highly risked. At the current price of 1.40p, the stock price remains almost laughably dislocated from its fundamentals and prospects – something not lost on major investors but seemingly so on UK stock market participants. At some point this undervaluation will be corrected and thus the lowly stock price continues to offer a rare opportunity in the small cap mining space, not least one poised to imminently move into net profitability. We thus reconfirm our Conviction Buy stance.
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