Trustco: A tale of shifty mines
The investment company’s acquisition of NNDC doesn’t yet seem to have paid much dividends
A large part of Namibian investment company Trustco’s recently released annual report is dedicated to its fledgling resources sector.
This is understandable, as a chunk of its shareholder equity has been mobilised to buy the diamond mining interests contained in the Northern Namibia Development Company (NNDC).
These assets happened to be owned by Trustco CEO and prime mover Quinton van Rooyen, who is set to receive a princely consideration of R3.6bn in a staggered scrip settlement deal. The assets have been punted as a game-changer for Trustco, which is under some strain in terms of cash flows and maintaining a stout balance sheet to fund its operations (which, aside from mining, span banking, insurance and property).
Some context before proceeding. The R3.6bn valuation for what is a dormant diamond mining operation with no record of reassuring carat production is many times the combined market value of some of the most promising (and profitable) commodity producers on the JSE, such as Merafe and Wescoal.
At this point the newly constituted Trustco Resources comprises the NNDC operation — which seems on the verge of getting a long-awaited green light to start mining — the Meya Mining operation in Sierra Leone and the Morse cutting and polishing business.
The annual report contains no forecasts for Trustco Resources, with directors arguing that diamond markets are changing at a much faster pace today than before. What is claimed is that Trustco Resources’ "mine to market" strategic plan is advancing steadily, and that progress will be accelerated once the two mining licences are secured and both mines (NNDC and Meya) are in commercial production.
What can be gleaned from the annual report is that NNDC’s operations put in an underwhelming performance in the short period of actual mining between the start of April and the end of June 2017.
A total of 223ct was recovered with a meagre yield of just 0.13ct per stone.
Trustco admits that despite some modifications to NNDC’s processing plant, the performance during the second quarter of 2017 remained well below the original forecasts.
Consulmet, a Johannesburg engineering house, has been called in to sort out the processing challenges at NNDC, which in brief are described as "a unique processing challenge which renders the current flow-sheet ineffective and inefficient as the crushing circuits are inadequate, which [affects] liberation and recovery".
Trustco believes this is not a challenge that is unique to NNDC, as very few entities have successfully applied the correct crushing, engineering and processing equipment in this application from the outset. Maybe, but shareholders might have expected something a little slicker for the R3.6bn price tag.
NNDC’s 223ct were sold to Morse at an average price of $153.57 a carat, resulting in a haul of less than R500,000.
The lack of activity at NNDC, which was acquired in late 2015, meant that Morse’s cutting and polishing factory was operational for just two months of the financial year to end-March.
The lack of supply from NNDC led to operations being suspended in June 2017, and these will resume only once the mining licence is officially granted.
Meya produced richer fare, with a 477ct diamond, dubbed the Meya Prosperity Diamond, recovered from the first kimberlite bulk sample. But Meya will need many more such lucky strikes before Trustco Resources moves the needle at the bottom line.
The push to find traction in the resources segment comes at a tricky time for Trustco. The FM has already documented the poor operational cash flow of just R33m (compared with pretax profits of R242m) in the past financial year when finance costs were R188m.
Significantly, Trustco is engaging with long-standing institutional investors to facilitate "a potential consensual restructuring of the long-term debt arrangements".
Trustco has, however, received correspondence that its lenders are reserving the rights in place — both in terms of the covenants set out as well as the repayment terms.
Borrowings sat at more than R1.3bn at the end of March. The borrowings are seemingly well covered by Trustco’s investment property portfolio, but the more than R400m upward revaluation at a time when Namibia’s property sector appears on shaky ground has raised eyebrows.
In his commentary in the annual report, Van Rooyen maintains: "All funders are not created equal, but are valued equally. Our funders are our partners in sustainable wealth creation and they remain eager to be part of Trustco’s plans."
Let’s wait and see …