John Teeling
A research note by Westhouse has revised valuation of Botswana Diamonds stock as a result of a joint venture with an international diamond major. The move follows a recent deal where BOD signed a joint venture agreement with Alrosa, the Russian state owned company.
Westhouse said investors need to take a view on whether the company can generate positive news flow as it explores for diamondiferous kimberlites in Botswana.
“Our revised valuation, based on previous expenditure, committed future expenditure and the value of the database, suggests a target price of 7.0p and we upgrade to Buy from Add,” it said in a broker note.
“We believe the tie-in with Alrosa mitigates some of the risks associated with the exploration due to the access to Alrosa’s technology. In addition, investors must also take a view on the company’s financial position, specifically with regards to it meeting its funding requirements as part of the JV going forward,” it added.
Westhouse added that as the only company to cover Botswana Diamonds, ‘we are the consensus’. “As our valuation is based on the company’s exploration programme, any upgrade or downgrade to our forecasts will depend on its level of success.”
The joint venture deal signed by Botswana Diamonds and Sunland Holdings SA, a wholly-owned subsidiary of OJSC “Alrosa”, the world’s largest diamond producer by volume will enable Botswana Diamonds to apply Alrosa’s technological knowledge to its extensive database.
“We believe that the company is now well-positioned to generate positive news flow as a result of its collaboration with Alrosa, given the latter’s technological knowledge and BOD’s extensive database,” said Westhouse.
“However, should this fail to occur there is a risk that the company will be unable to attract enough funding to finance the evaluation of alternative exploration targets. There is also the potential that any weakness in the diamond market may affect investment into the sector.”
It added that the Alrosa JV further enhances the early-stage opportunity to invest in a management team with a track record of realising value from African-based mining operations. The BOD management is the one that discovered AK6 and what is now called the Karowe mine owned by Lucara Diamond. “We believe this demonstrates the management team’s ability to operate successfully in the region,” added Westhouse.
Westhouse said Botswana is still one of the most attractive mining jurisdictions in the world, especially for diamond producers and explorers. The country is politically stable and diamond mining has helped to drive significant economic expansion over the past few decades. Botswana ranked highly across the board in the most recent Fraser Institute Survey of Mining Companies.
“Our resulting target price of 7.0p implies upside of 133% from the current share price (3p), which reinforces our new Buy recommendation (previously Add). Due to a lack of acceptable peers, we base our valuation on a combination of previous expenditure, committed future expenditure and a valuation of the company’s database.”
Botswana Diamonds’ primary focus continues to be within Botswana, where it has recently announced three separate joint ventures as part of an ongoing programme to establish significant acreage to be explored in conjunction with Alrosa.
The latest JV is with Alrosa. It is a heads up, 50:50 agreement signed in August 2013, with an initial budget of US$1m. It was preceded by a Technical Cooperation Agreement in 2012, following which the companies spent 18 months selecting the best ground in Orapa. The partnership identified an initial 13 targets, and has applied for 12 licences as a result.
The priority target at present is adjacent to AK10, a diamondiferous kimberlite which is located 10km from AK6 (Karowe). The project is located within the P117 licence held by EverSharp, a private Botswana company, with which BOD has a joint venture agreement. Although the project was drilled by African Diamonds, a recent review of the data by Alrosa has convinced the company that it is worth revisiting.
BOD’s third joint venture is with Brightstone Mining, and is focused on a 13 licence block covering 6,518km2 in the Gope area. The surrounding region contains both Gem Diamonds’ Ghaghoo mine, and Petra Diamonds’ KX-36 discovery in amongst the region’s 21 known kimberlites. On signing the agreement, BOD became the operator of the block. Alrosa has applied its techniques to the region and generated potential targets.
BOD also has an 85% interest in a 484km2 exploration block adjacent to Mobilong. The licence was chosen as it lies alongside one owned by CNK Mining, a South Korean company which has announced that it intends to start a commercial 1Mctpa mine at the project.
In Mozambique, BOD’s initial work has identified potential paleoplacer channels, which may be followed up by more focused exploration.
