Johannesburg - For much of this week, shares in junior diamond miner Kimberley Consolidated Mining (KCM) were bid at 1c and offered at 27c, suggesting the market has some fairly disparate views on value.
At around the time of KCM's listing in May, its financial director Koos Pieterse told Summit TV that the company believed a trading range between 100c to 120c was a "fair price".
A few weeks later, KCM alleged "certain individuals or groups" could be deliberately trading a portion of their KCM shares at "a discounted share price" in a bid to manipulate the market.
At that point, KCM reiterated that the original listing price of 100c/share was based mainly on existing assets and did not reflect the blue sky potential of "various existing and new projects".
The half-year to end-August 2008 results - not reviewed (perhaps significantly) by the company's auditors - display a far different valuation. With equity and reserves shown at R107m, KCM carries a net asset value of about 24c/share.
But the equity and reserves include intangible assets of about R75m and more than R20m in goodwill. Strip these non-physical assets out of the equation and KCM has a tangible NAV of closer to 2.4c/share.
Now, it can be argued that mining exploration companies should not really be measured on their net assets.
But in the case of KCM there could be a case for digging for a realistic value because the interim results suggest the firm's ability to progress hinges firmly on productive assets housed in its much-vaunted Bo-Karoo mine.
It's probably not too much of a generalisation to suggest that only a few investors bother reading the technical reports that are attached to new mining listings.
But a report by consultant Venmyn shows a number of potential scenarios in which Venmyn indicated "a project net present value (NPV) of R75m over a life of mine (LOM) period of nine years".
Taking the number of KCM shares in issue (450m), that would give Bo-Karoo a value of around 17c/share.
Skies cloud over
To get to KCM's inferred listing price of 100c, it would seem directors were expecting quite a churn of high-quality gems in the short term from Bo-Karoo - or else the blue-sky factor in the exploration portfolio was really awe-inspiring.
Right now, the blue sky has pretty much clouded over and the production capabilities of Bo-Karoo is the centre of some rather intense scrutiny.
Venmyn's technical report noted that since the start of the operations at Bo-Karoo in July 2005, an average monthly production of 235 carats (cts) had been achieved amounting to a total of 6 262 cts worth about R85m.
In other words, Bo-Karoo is a productive asset, capable of generating strong revenue flows.
Venmyn also noted that the Bo-Karoo diamonds were of "excellent gem quality and large average stone size", and that occasional very large stones have been recovered (including a 98 carat stone sold for $26 000 in 2006 and a 123 carat stone in sold for $26 000 in August 2007).
But with KCM producing turnover of R37m and an operating loss of R20m in the half-year to end August, it seems clear things have gone awry.
Valuations matter more than hype
If we go back to the transcripts of the Summit TV interview in May, it seems strange then that Pieterse was confidently predicting full-year turnover of R92m and profits of R12m. That seems a long way off when scanning the half-year results just released.
Naturally, Pieterse's prediction that KCM could produce turnover of R120m and profits of R30m in the year to end-February also come into question.
Venmyn's assumptions on Bo-Karoo's production profile pencilled in far more modest turnover levels of R63m for the year to end-February 2009 and R69m for the 2010 financial year.
More importantly, though, Venmyn expected operating profits for those two years to come in at R30m and R31m respectively, with projected nominal free cash flow of R25m and R21m.
The top line Bo-Karoo, in the interim period to end-August, looks pretty much ball-park in terms of Venmyn's assumptions. However, it's the R57m operating costs that suggest management risks losing the plot at this early stage.
While Venmyn's concluding remarks in its technical report states that "Bo-Karoo is a valuable asset", eager shareholders should probably have paid much more attention to the R75m valuation placed on the mine.
Maybe developments at KCM will convince more junior gem junkies to pay attention to valuations in technical reports rather than responding to hype.
In any event, determined punters can now have a field day pitching for KCM shares anywhere between 1c and 27c - happy in the knowledge that the frilly stuff has been ripped off this new listing.
- Fin24.com