IPO Watch: Frontier Diamonds $6m Initial Public Offering closes Friday
Pure-play diamond miner Frontier Diamonds has surpassed the minimum subscription level for its $6 million Initial Public Offering.
Potential investors have until Friday to take part in the IPO.
Frontier is focused on the development and production of two operating diamond mines in South Africa – The Star and Sedibeng Mines – which it acquired from Petra Diamonds, the country’s biggest diamond producer and the world’s fourth largest.
Management personally invested $US9 million to bring the two diamond mines into operation. They have taken the mines from zero production to a net profit of $7.6 million in just four years.
The IPO, which is priced at 20c per share, will close on December 8 with Frontier to list on the ASX shortly after.
‘Significant upside potential’
The operation has “significant upside potential, especially at Sedibeng”, according to a research report Independent Investment Research (IIR).
“With its Sedibeng and Star operations, the company has two very well-understood mines that have a long history of consistently producing high-quality, high-value diamonds, and that still have resources to support a 15-year-plus mine life,” IIR reported.
Frontier Diamonds could be producing “more than 100,000 carats per annum in the short to medium term”.
$US5.7m revenue and $US2.8m profit
Frontier has spent about $14 million upgrading the mines over the past three years. Last year they generated $US5.7 million revenue and $US2.8 million profit after tax and other comprehensive income.
Sedibeng (pictured below), which includes the merged Dancarl and Messina Mines, is close to infrastructure and lies about 40km north of Delportshoop in the Northern Cape Province of South Africa.
Star Diamond Mine is 12km from Theunissen in the Free State Province of South Africa, adjacent to a regional sealed road.
Both projects were originally owned by Crown Diamonds. Post-merger with Petra in 2005, the projects become non-core assets in the Petra portfolio.
However, as those in the mining exploration industry are well aware, what is considered non-core to a major producer is often a major game-changer to a junior.
Watch: Frontier Diamonds investment research by Mark Gordon
Both projects have excellent grades, produce high value diamonds and have an expected life of 15 years.
With reserve grades respectively of 42.6 carats and 21.6 carats per hundred tonnes (“cpht”), the Star and Sedibeng fissures are considered relatively high-grade deposits.
Both projects produce a high proportion — greater than 90 per cent — of gem-quality stones.
Experience and relationships
What really separates Frontier from other diamond miners is the experience of its operating management.
Frontier founder and chief executive officer Jan Louw has extensive, hands-on experience and ties to the South African minerals industry.
Importantly Jan has a unique ability to build and refurbish operating plants and technical equipment maintaining both capital and operating costs to a minimum.
With a formidable resume that includes 15 years at Anglo Mining Engineering and five years at Firestone Diamonds, Jan has designed and built all manner of plants in his engineering career.
Watch: Interview with Frontier Diamonds managing director Jan Louw
Three years ago, Mr Louw built a plant for Petra Diamonds at its Finsch mine, the biggest diamond-producing mine in South Africa. Frontier still operate this plant on contract for Petra.
It was through this relationship that Petra sold its Star and Sedibeng mines to Frontier in 2014 together with managing monthly diamond sales in Johannesburg, transport, security for and on behalf of Frontier.
This relationship may bear further opportunities with Petra going forward.
Funding the project
Since acquiring the projects back in 2014, Frontier has been focussed on refurbishing and restarting operations, has introduced new capital development and operational changes to reduce costs and deliver efficiency improvements.
In a clear sign of confidence in these projects, Frontier’s board and management used their financial resources digging deep into their own pockets, investing $US9 million to get the projects into operation.
“When we bought the projects, they were in care and maintenance,” Mr Louw told Stockhead.
“We invested our own money into the projects to get them back into production.
“During that time, we have repaired a lot of infrastructure and most importantly we did a lot of trial-mining using different mining methods and practices.
“Our philosophy was while we work on the infrastructure — which takes time but not much capital — we funded that for ourselves.
“We are now at the point where we need to sink new shafts to the bottom and open more fissures to handle increased production.
“We also know what mining technique to use. It is now at this point that we can use the capital we raised from the Pre IPO raising to increase both scale of the operation to the point where we can now ready to IPO the Company.”
Mr Louw believes there is significant upside potential, especially at Sedibeng, including extensions to the known fissures and definition of resources at nearby abandoned mines.
Frontier is also planning to process existing tailings dumps at Sedibeng, containing some 124,000 carats, through a plant it has recently purchased.
Bulk testing at the nearby Bellsbank Pipe is also taking place while opportunities to pick up other historic assets could lead to a production of greater than 100,000ctpa in the short-to-medium term.
The treating of these dumps and pipe production are not factored into Frontier’s $9 million 2019 profit projections and might add between $4 million and $7 million to its bottom line.
(These forecasts relate to future events that are subject to a number of uncertainties and may differ materially from results ultimately achieved.)
There are also a number of abandoned mines around Sedibeng available for acquisition, Mr Louw said.
“By acquiring these mines, you could plug these smaller mines into a larger operation that also provide scale benefits that the larger mines have,” he said.
Under the offer, Frontier is seeking to raise up to $6 million at a 20c per share issue price.
When listed, Frontier is expected to have a market cap of $42 million with $6 million in cash and no debt. It is expected to trade under the ASX code FDX.
This special report is brought to you by Frontier Diamonds
This information is not advice and has been prepared without taking into account your objectives, financial situation or needs. You should seek advice, in light of your own specific objectives, financial situation or needs.
This document is not Financial Advice. The recipient of this information is advised to refer to the Product Disclosure Statement (PDS) relating to the product and consider the PDS before making any decision about whether to invest.
The prospectus can be downloaded at www.frontierdiamonds.com and is also available through www.OnMarket.com.au.
The offer of securities is made in the disclosure document. Investors wanting to acquire the securities must complete the application form in the disclosure document.