Energem refocuses on fuel

Vancouver — One of the most controversial African diamond producers of the 1990s is distancing itself further from its past.

After a strategic review prompted by a share price in steady decline since 2005, Energem (ENM-T, ENMFF-O) is shedding its long-held Koidu diamond mine in Sierra Leone, among other assets, to focus on mid-stream oil, gas, and biofuels.

In slimming down its holdings and focusing on fuel, Energem (previously DiamondWorks) is completing a thorough restructuring that began in 2001 when the company’s present-day controlling shareholder, Lyndhurst Ltd., bought in, reducing the old shareholders to below 1% and installing new management into what was largely a failing mining and exploration company.

By 2004, Africa-based Energem grew into a diverse natural resources company with only 25% of its business related to diamonds, and the rest mostly concerned with oil and gas. In that time, its share price rose to a high of US$3.50 from only 40. In 2003, the company made US$12.1 million in profit (19 per share) on revenue of $153 million.

In 2007, Energem has been losing money: at the end of March the company announced a first-quarter loss of US$10.52 million, up from a loss of US$4.41 million for the same period last year. Energem’s share price has been on the decline since mid-2005, from a high of over US$3.80 to their current value around US41. The decline prompted a strategic review, which concluded that the company needed to simplify its business.

As such, in mid-May, Energem stepped even further out of the diamond mining business, selling its 40% interest in Koidu Holdings for US$18.25 million. Koidu owns and operates the Koidu kimberlite diamond mine and the Tongo Fields exploration area, both in Sierra Leone. The mines had been achieving an average price of US$230 per carat.

Energem’s 40% interest is going to BSG (Beny Steinmetz Group) Resources, which already holds a 25% interest in Koidu, as well as another 35% interest through its subsidiary, Magma Diamond Resources.

The sale price of US$18.25 million represents a US$6-million premium over the funds invested by Energem since the mine restarted operations in early 2004. Energem spent roughly US$12 million redeveloping the mine, including building a 50-tonne-per-hour dense media separation (DMS) plant. The mine had lain dormant since 1997 because of civil war in Sierra Leone.

Part of Energem’s incentive to sell its interest in Koidu is that the mine is in need of roughly US$45 million for underground development. That investment would have come without any cash flow to Energem for three years.

Energem also sold its 60% interest in the privately owned commodity trader Republic House AG, to the existing 40% shareholders. The 60% interest is valued at about US$3 million, $1.25 million of which will be paid immediately, $1 million in August, and then three payments of $250,000 every three months.

As it sheds a few layers, Energem is developing new ones. As part of the fuel-focused restructuring, the company has established a new operating division called Energem Biofuels. The Kisumu ethanol plant in Kenya is the core of the new division.

Energem’s decision to focus on fuels is no surprise, given its numerous fuel-oriented holdings. The company has a 50% controlling interest in a US$50-million oil product storage and distribution facility in Nigeria, which was built and commissioned between 2004 and 2006. Energem also owns a smaller oil storage and distribution facility in Malawi.

In late 2005, Energem commissioned its 55%-owned Kisumu ethanol plant. The plant is plagued by shortages of molasses feedstock, but when the stock is available production and sales levels are on target. And the company holds a 29% interest in FirstAfrica Oil, a subsidiary of Bowleven (BWLVF-O, BLVN-L) that holds near-production as well as exploration-stage oil assets in Gabon. Finally, Energem holds a 100% interest in the oil exploration rights in Chad’s Chari Ouest and Largeau basin.

At the same time, the movement towards fuels brings closer to an end a dramatic chapter in the history of the company. Energem still has a 48% stake in the Luo kimberlite and alluvial operations and a half-interest in the Yetwene alluvial mine, both in Angola. DiamondWorks brought both assets into commercial production in 1997; together, the mines yielded 200,000 gem-quality diamonds by 2001.

In November 1998, 50 men attacked the Yetwene mine, leaving eight dead and 16 wounded. In addition, four senior managers were kidnapped during the attack; they were never found and are presumed dead. The company shut down Yetwene and Luo in 2001, but are still talking with the Angolan government and other parties about the possibility of reopening the mines.