After the most recent news release reporting sales of 5,442.57 carats generating gross revenues of USD $1,074,780.69, which resulted in a combined average price of USD $197.48 per carat for the quarter I have caught up with CEO Dean Taylor together with fellow Breakout Investor Bryan Robson.
As a reminder, we have been following the company ticker DMIFF all year and I am long since it was below 10 cts. Our most recent podcast from November 26 is here and the next one with the current update is imminent. You will find it in the usual place. The call with Dean was very enlightening and as always I am coming away with a very good feeling. There is one slight negative I will highlight again at the end of this post.
- They would have produced 1000-1500 ct more this Q (fantastic considering volumes were already up 25% QoQ regardless) if not for minor wet season issues and especially a power outage from the utility. This cannot happen again, the company has implemented countermeasures, see Standby Power Upgrades.
- After the slower holiday time Dean is expecting February to be a “break out” in terms of volumes. This is the key point to watch. They HAVE to deliver on those volumes.
- A deal they had pursued to buy a used BV machine with a plant is falling through. The seller is simply not trustworthy and Dean won’t risk shareholders’ money. Instead the manufacturer Bourevestnik who has brokered the deal (and is quite fed up), gives them access to two brand new machines for less money (!!) ie 7.5M rand
- The first expected in March and will help push production to 5k carats per month around mid year. The deposit for it is going to be made soon and perhaps worth a PR.
- Two additional machines are planned and those will help ramp to 10k ct per month towards 2023. This would get them roughly by my estimate to 5-10ct in cash flow per share fully diluted and depending on prices.
- Speaking of prices the most recent Q was without specials, which weighed on the price. But the individual categories performed very well and most importantly even at $200 the economics work out very well (maybe 5-7 ct a share eventually). I am also getting the sense that prices could pick up again soon. But I would raise my eyebrows to say the least if we saw continued prices below $190.
- But please note these are very rough estimates and there are a lot of moving pieces but the economics are beautiful and the operating leverage is very significant. Especially the new BV machines will hardly add any cost and ramp production materially. The first one will screen mostly for stones 10mm and larger whereas the current DMS plant screens mostly for 10mm and smaller so they are perfectly complementary in that sense.
- Resource update by Q3 2022. Drilling is AMAZINGLY simple and cheap. They will buy 1 RC drill and keep it running even beyond the new report. Holes are only 15m deep and quick with ca 1 hole per hour. Compare that to copper or gold where explorers spend millions of dollars and drill hundreds of meters. The drill bit will determine the volume and bulk sampling the grades. An independent person for a 43-101 is already found, a lady with 30 years of experience.
- Major positive: They mined in an area outside the known deposit this Q. Results are fantastic with high grades, which lends credence to a much bigger resource. This development is very exciting but a larger resource is also necessary.
- There was also bulk sampling in the “area over the hill”. The geologist is very excited and this area is showing all signs of being very prolific.
- Current resource 1M ct, the max estimate from DeBeers is 50M, but all of those will never be found.
- Balance sheet will look much better in 2022 with the convertibles mostly gone (and shares not hitting the market), the equipment loan being soon paid off and the Tiffany debt to be restructured (on very good terms). They are current on payables.
- Dean has confirmed to me before that there are no effects of omicron to them.
I promised a negative and here it goes: I had anticipated scaling to 10k ct per month a little earlier than going into 2023. So I will have to wait a few months longer LOL. There are not yet all pieces in places for this, especially two BVs are required for that and the new resource estimate corroborating additional scaling up. It should be mentioned also though that the larger they prove the deposit to be, the higher Dean wants to ramp production. His rational is in an NPV calculation you don’t get a lot of value for the years 15+. So he wants to exploit this deposit as quickly as possible.
He also is open to a take out once they have stable production and strong cash flow. That will be dictated by the price and what shareholders say. Dean is very close to his major shareholders and respects them. The same holds the other way round: the shareholders are very supportive to the company. For example there is an informal agreement that they would help the company out should there ever arise an urgent need for cash, say in case a deal for machines was available.
If you have made it this far, here is some more let’s say speculation. Tiffany is not interested in owning a mine. DeBeers is a natural acquirer. Will they pull the trigger? Why not earlier though? The best case for the share price would likely be a bid from PE, China or Russia. In that scenario DeBeers would almost certainly bid higher because they will hardly tolerate just about anybody that foreign in direct neighbourhood, within the same fence and security area.