INVESTMENT COMMENTARY — Success in Zimbabwe, Colorado renders Redaurum a buy

With two projects under development and one in production, Redaurum (TSE) is a rising star among junior diamond miners.

In a report, Roger Chaplin, analyst with T. Hoare & Co., draws attention to the company’s strong cash flow and planned growth in production, and to the fact that it is one of only a handful of publicly listed, purely diamond mining companies in the world. For these reasons, he has no hesitation in recommending Redaurum as a buy.

The company’s flag ship is its 50%-owned River Ranch mine in Zimbabwe. In 1994, the open-pit operation cranked out 150,000 carats, and annual production is expected to exceed 700,000 carats by 1997.

Redaurum is also bidding for control of Auridiam Consolidated, its Australian-based joint-venture partner in River Ranch. Chaplin predicts the bid will succeed, which would enable Redaurum to gain full control of the operation.

Production at the mine is derived largely from a pipe that measures 5.2 hectares in surface area. Drilling indicates the pipe shows little “coning effect” within the first 200 metres, and proven reserves in the main pipe are estimated at 17.5 million tonnes grading 0.36 carat per tonne to a depth of 150 metres.

While Redaurum has not released a dollar value per carat at River Ranch, Chaplin offers an estimate of US$50 per carat. He concedes this is a conservative figure in that the pipe has produced some larger stones that commanded a greater value. Moreover, future revenues could be significantly enhanced by a small number of large stones selling for high prices.

Besides River Ranch, Redaurum holds interests in two other properties, one in South Africa and the other in Colorado.

The former, known as Quaggas Kop, is a small, alluvial operation which, in 1994, yielded roughly 2,000 carats valued at US$350,000. Redaurum has upgraded the recovery plant and mining equipment, and is considering doubling the plant’s capacity.

When Redaurum purchased the property, reserves were 50,000 carats, of which 85% were gem stones. The average dollar value per carat was US$185.

Recently, the company discovered a paleo-placer deposit on adjoining ground. Drilling will be carried out before year-end, and Chaplin reports that contained carats could well exceed 300,000.

Situated in northern Colorado, the Kelsey Lake project is poised to become America’s first commercial diamond producer, with startup scheduled for 1996. Since gaining a 25% stake in the property two years ago, Redaurum has identified a cluster of eight kimberlites, taken a 10,000-tonne bulk sample and increased its ownership to 75%. The bulk sample contained more than 600 stones, two of which were gem-quality, weighing in at 14.2 and 6.2 carats.

A recovery plant, with a capacity of 250,000 tonnes per year, is under construction, and a prefeasibility study is in progress. If results from trial mining warrant, Redaurum will build a 1-million-tonne-per-year plant.

Redaurum’s entire portfolio of African properties includes 5.5 million hectares in Zimbabwe (or 15% of the country’s surface area), 1,514 sq. km in Botswana and more than 63,000 hectares in Namibia.

Total production could reach 800,000 carats by 1998, representing 0.8% of the world’s diamond yield. With River Ranch already turning over an operating profit, Chaplin forecasts an overall earnings-per-share figure of 40 cents. And based on a successful takeover of its joint-venture partner at River Ranch, he projects a value per share of $2.64.