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Pallinghurst share price leaps on value unlock outline

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Pallinghurst share price leaps on value unlock outline

Photo by Duane Daws
Arne Frandsen (left) and Brian Gilbertson at Pallinghurst's listing on the JSE ten years ago

19th May 2017

By: Martin Creamer
Creamer Media Editor

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JOHANNESBURG (miningweekly.com) – The share price of mining investment fund Pallinghurst leapt in Johannesburg after the company outlined its plans to swop its investment fund shawl for a diversified miner’s mantle, unlock value through full absorption of its coloured gemstone associate and target a possible listing of the enlarged but greatly simplified Pallinghurst on the main board of the London Stock Exchange, without any change to its primary JSE listing.

“We’re converting Pallinghurst into a diversified, ever-green company and we’re taking the assets of Gemfields in-house,” Pallinghurst CEO Arne Frandsen explained to Creamer Media’s Mining Weekly Online in an interview, which took place as the company’s share price leapt 5.43% to 350c a share.

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The key step involves buying out the minorities of coloured gemstone producer Gemfields for $150-million worth of Pallinghurst shares – and delisting Gemfields from the London Aim.

“Pallinghurst has been a long-term and supportive investor in Gemfields, but the current structure has proven unattractive for both Pallinghurst and Gemfields.

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“The offer is a logical next step in consolidating and simplifying the group structure. This will position the enlarged company well to pursue Gemfields’s vision of global leadership in coloured gemstones, to the benefit of all shareholders,” Pallinghurst chairperson Brian Gilbertson said in a release.

Following the offer, Pallinghurst sees the enlarged group as having a larger market capitalisation, an enhanced free float, improved market coverage and an expected liquidity boost.

The offer is due to close in the third quarter of this year.

Pallinghurst believes that the integration of Gemfields will enable it to perform to full potential, materially improve trading liquidity and promote a re-rating of the enlarged group.

Because of Gemfields' depressed profitability and restricted access to third-party capital over the past few years, Pallinghurst has had to provide Gemfields with debt facilities.

Gemfields said in response that its independent board had noted Pallinghurst’s unsolicited offer for the entire issued share capital not already held by it and was reviewing the offer with its advisers.

It “strongly” advised shareholders to take no action and to await further announcements.

The coloured gemstone mining and marketing company then went on to reveal the results of is latest auction of rough emerald extracted from Kagem, which is 75% Gemfields-owned and 25% Zambia government-owned.

The emerald auction, it said, had raised $14.5-million at an average price of $4.68/ct, which was the second highest average price achieved at a commercial quality emerald auction.

All carats offered were sold, a first for a commercial quality Kagem emerald auction.

Twenty five Kagem auctions held since July 2009 have generated $473.5-million in total revenues.

FAIT ACCOMPLI

With irrevocable 75%-plus shareholder backing, delisting takes a mere 20 business days of the Aim’s receipt of a delisting request letter.

“We already have irrevocable undertakings from more than 75% of the shareholding, so the transaction, for all practical purposes, is a fait accompli,” Frandsen commented to Mining Weekly Online.

Gemfields shares responded by rising 3% to 5% on the Aim.

Founded in September 2007 as a limited-life mining investment fund to source and develop new value-accretive mining projects, Pallinghurst sees itself as having achieved that phase through the development of:

• Gemfields, which has the world’s biggest emerald mine at Kagem, in Zambia, and the world’s biggest ruby mine, at Montepuez, in Mozambique;

• manganese producer Tshipi, which operates at low cost in South Africa’s Northern Cape province; and

• opencast platinum group metals (PGM) operation Sedibelo in South Africa’s North West province, which is implementing the impressive cost-slashing, time-saving, mine-broadening, pollution-removing and cobalt-preserving Kell technology that has all the hallmarks of being transformational for the entire PGM industry.

Pallinghurst created Gemfields by giving the company custodianship of Kagem in exchange for shares in Gemfields.

Then in 2012, Pallinghurst exchanged the custodianship of the famous jewelled egg company Fabergé  for more Gemfields shares.

But the Gemfields share price has failed to respond. When Pallinghurst put Kagem into Gemfields eight years ago, the share price of Gemfields was around 40p a share; yesterday it was 38p a share.

The low Gemfields share price presents a major problem for Pallinghurst, as half of its net asset value is represented by its Gemfields shareholding.

Failure of Gemfields’ share price to rise results in the failure of the Pallinghurst share price to reflect value.

With the delisting of Gemfields, shareholders will have one entry point through Pallinghurst.

“It’s much better to take 100% of Gemfields and let Gemfields’ minority shareholders benefit from a company that has been unshackled and where management can focus on the operations,” said Frandsen.

While the primary JSE listing will remain intact, Pallinghurst’s Bermuda listing is earmarked for migration to the LSE.

“Johannesburg is our primary listing and I don’t see that changing. We like Africa. We’ve already got four mines in Africa, and we see many exciting prospects in Africa. We’ve moved into Zimbabwe with Kell and we’re also looking at Ethiopia,” Frandsen told Mining Weekly Online.

Not only will construction of a new Kell concentrate-to-refined metals plant begin in South Africa this year at Pallinghurst’s Sedibelo platinum mine, but a far-reaching agreement has been struck for up to five Kell plants to be built in neighbouring Zimbabwe, where it has been agreed that over time all the platinum concentrate produced in that country will be Kell processed.

As the plants will be 51% Zimbabwe-owned, Zimbabwean indigenisation requirements will be fulfilled for the platinum mines passing concentrate through the Kell plants in Zimbabwe and no longer sending concentrate out of the country.

The lack of power capacity in Zimbabwe and high cost of establishing smelters and refineries is taken care of by Kell, which uses less than a fifth of the power required for smelting and refines the PGMs as part of the process at a tenth of the conventional cost.

It will also mean that South Africa-linked platinum mining companies operating in Zimbabwe will no longer be faced with the upcoming 15% duty on all concentrate leaving the country.

When Pallinghurst’s Sedibelo company was launched in 2012, Mining Weekly Online witnessed Gilbertson, Frandsen, Kell developer Keith Liddell, IDC CEO Geoffrey Qhena and IDC mining executive Abel Malinga commit to the development of Kell, to ensure the local beneficiation of South Africa’s PGMs could be done in South Africa competitively.

Now, five years later, Kell is making it possible for local beneficiation to take place super competitively, not only in South Africa, but also in neighbouring Zimbabwe, the world’s second major platinum area.

Kell also opens the way for lowest-cost local manufacture of PGM-using autocatalytic converters and platinum-using fuel cells, if not in South Africa then in Zimbabwe.

Kell reduces mining-to-refining time to a week instead of a month-plus, uses less than a fifth of the electricity needed for smelting, replaces a smelting plant that costs $1-billion with a modular hydrometallurgical plant that costs $100-million, widens mining scope by throwing chrome-ore content caution to the wind, adds tens of millions of dollars to the revenue stream by recovering the cobalt metal that smelting obliterates and eliminates all pungent and toxic sulphur dioxide that smelting emits.

“It’s green, it’s right and it’s here in South Africa,” is how Frandsen sees it.

By removing the chrome constraint, mining can be optimised, particular in the case of upper group two reef concentrators, which is worth between 5% and 10% additional recovery.

Recovery of currently burnt cobalt would add $50-million to $60-million to the revenue stream of South African platinum mining companies and $15-million to $20-million in Zimbabwe.

Zimbabwe’s Cabinet approved the proposal to establish a Kell technology PGM refinery in Zimbabwe in March and a memorandum of agreement was signed this week between the Pallinghurst- and IDC-owned Kelltech and the Zimbabwe Mining Development Corporation.

The obligations of the Ministry, under Mines and Mining Development Minister Walter Chidhakwa, is to provide adequate concentrate feedstock to ensure full capacity utilisation of the Kell technology PGMs refinery.

The government of Zimbabwe has thus guaranteed that Kelltech will receive all the concentrate it needs as feedstock to meet the capacity of up to five Kell plants.

BENCHMARKING AGAINST PEERS

After the restructuring has taken place, Pallinghurst envisages the emergence of a renewed company, with a simplified operating model and an in-house management team of made up of its current executive base.

It believes that the value of the underlying assets will be more clearly demonstrable with clearer earnings and operating metrics that can be benchmarked against industry peers.

On completion of the offer, Pallinghurst expects to have an enlarged market capitalisation, improved trading liquidity and equity broker coverage, leading to value accretion for all shareholders.

Said Frandsen: “We’re turning Pallinghurst into a normal diversified mining company with operating assets and a focus on cash generation," bringing to an end the company’s ten-year stint as a mining investment fund.

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