Diamonds in the veldt

KimCor Diamonds is the latest mining junior to raise funds for acquisitions through an AIM listing. Chief executive Martyn Churchouse spoke to M&A.

KimCor Diamonds is the latest mining junior to raise funds for acquisitions through an AIM listing. Chief executive Martyn Churchouse spoke to M&A.

KimCor Diamonds is the latest mining junior to raise funds for acquisitions through an AIM listing. Chief executive Martyn Churchouse spoke to M&A.

When KimCor Diamonds listed on AIM in 2006, the company’s business plan was to build on its existing core strengths in diamond production and carry out bolt-on horizontal and vertical acquisitions in Southern Africa.

KimCor initially acquired a tailing dump reprocessing operation located at Bellsbank, 120km from Kimberley in South Africa and within a few months, the company had acquired an advanced exploration project in the Koffiefontein kimberlite cluster. More recently, KimCor decided to expand its production capacity with the £9 million reverse takeover of Dwyka Diamonds, giving the enlarged group a diversified asset base of producing mines that have the potential to generate sustainable production of more than 200,000 carats a year.

For KimCor’s chief executive Martyn Churchouse, the Dwkya purchase was a crucial move for the company and its shareholders. “The acquisition is an important step in the medium to long-term strategic growth plan of KimCor, and we believe it positions the company to capitalise on future consolidation in the diamond sector and on further opportunities that are likely to present themselves,” he says.

W­hile KimCor had been looking to diversify, the deal also provided Dwyka with the opportunity to unbundle its diamond assets. For Churchouse, Dwyka was the best fit as an acquisition target, particularly as there was a chance to acquire further producing assets.

“Neither ourselves nor the Dwyka board have massive egos, so from that point of view it was easy to come to an understanding and a structure,” he says. Above all, this would raise KimCor’s production facilities significantly in a short time, which was what Churchouse and the board had planned since the listing.

Moreover, for Churchouse, the deal created obvious synergies, but with an added production focus. For instance, KimCor has as part of the Dwyka deal acquired the licence for Bosele, an exploration play located only 2km from the company’s existing and producing Bellsbank operation.

“Bosele provides us with the scope to treat the dumps we’re currently processing at Bellsbank and then, subject to the feasibility and evaluation of results at Bosele, tie this new potential resource into the existing Bellsbank infrastructure,” he says. “We can change the plant design and extend the general life of the operation.”

A Southern African focus

For Churchouse, acquiring those operations was pivotal for KimCor, which now has essential production skills that can be used in any location. “The key for us with our operations in the Northern Cape is that every mine has a finite life. If we can find new resources nearby that we can use or relocate the plant and have the workforce that’s skilled in operating those facilities, then it makes sense for us to focus in that area.”

Moreover, the Dwyka acquisition gives KimCor the scope to look at further expansions on existing operations or continue to purchase other mining concerns. “We can add value or turn an operation around by changing the plant or mining methods,” Churchouse says. “That’s fundamental for the future growth.”

The acquisition has also set KimCor on target to expand its revenues, giving it the ability to make further purchases without going back to AIM and the institutions for further capital injections.

Churchouse continues: “We don’t want to be in a situation where we are going back to investors looking for money. We are confident that the sum we raised at the listing will be sufficient for us to do all the work we need to make the existing operations profitable. In most cases we are planning to double the production rates. So we should also be able to accommodate further acquisitions.”

He added that should the board go back to shareholders it would be because the company had identified a substantial investment opportunity, such as a new operation that requires a large-scale new plant that is going to be an advantage for the shareholders.

South Africa strategy

For Churchouse, developing its South African operations in particular will help with its long-term acquisition strategy of buying up smaller diamond juniors, either in exploration or production.

Churchouse says: “With the diamond sector, particularly in South Africa, there are a range of different types and scales of producer, a number of which are small scale operators – all private companies – and there is always the scope to divest some of our existing assets if we decide something is too small for us or if we identify a more substantial opportunity we want to acquire.

“It’s easy for us to sell something on and conversely there are a lot of small operators that own projects that are too big for them, in the sense that, they don’t have access to capital to develop new operations which we can provide and benefit from them.”

Likewise, with the Bellsbank operation, “we are busy expanding the production capacity of the tailing reprocessing plant with a view to completing our mining programme within three years, after which subject to results, we can then use the same facility to process ore from our Bosele licence.”

KimCor’s operations are not solely focused on South Africa. It also has an ongoing programme in Tanzania, which is a joint venture with diamond giant DeBeers. “We’re starting the process of mining bulk samples now and plan to have that work completed by September next year,” Churchouse says. “By then we should be in a position to know whether we’ve got something that’s viable as an operation.”

Churchouse is quick to point out that KimCor generally only acquires exploration projects that are at an advanced stage, “where we have from the outset an idea of the possible scope and size of a potential project and the grades, as opposed to grass roots type exploration. We must focus on projects that can generate revenue quickly.”

With KimCor’s current activity levels, Churchouse is looking to raise revenues and the company’s share price, which has underperformed in the past year, dropping to 7p recently from 11p in April.

“It’s all about growth, expansion and achieving our targets now,” he says. “Like most diamond explorers and producers our shares have levelled off, but we have done better than most.

“Something we learnt prior to this acquisition was that we were effectively a one-trick pony and if you’ve only got one producing asset then you don’t have a steady newsflow [for shareholders] to put out. Now we’re in a different sphere and we have several things going on, so we will have a lot of information with which to update shareholders and maintain enthusiasm.”

He adds that the company will have the revenues and the scope to either look at further expansions on those existing operations or continue to pick up other mines “where we think we can add value, or turn an operation around by changing the plant or mining methods. That’s fundamental for the future growth”.

In the City

Meanwhile, encouraging signals have been coming from City institutions and the diverse shareholder base, following KimCor’s plans to move into profit and double production rates.

“We have always had a pretty small shareholder base – we only had about 200 prior to the Dwyka transaction – which has its advantages and disadvantages when it comes to doing a corporate transaction like the one we’ve done.

“It does make it a lot simpler because you’re only having to inform and update a small number of people, but on the reverse side, on a day-to-day basis, there is the issue of liquidity and maintaining the share price. Nevertheless, going forward with the new shareholders – individuals and institutions – we should have more liquidity and it’s looking positive.”

When quizzed about further KimCor acquisitions, Churchouse remains circumspect. But the idea is clearly appealing to the chief executive and the board.

“It is a possibility, we will continue to monitor the situation and since we’ve made our announcement we’ve had half a dozen approaches already from various groups. Everything is given due consideration and if an appropriate company comes along then the board will consider it.”

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.