Overview: Frontier Diamonds Ltd (“Frontier”, “the Company”) is a South African minerals company focused on diamond mining. The Company’s primary focus is on two operating mines, the Star and Sedibeng mines, both situated near the Kimberley region in South Africa. The Company has an Ore Reserve estimate of 1.63Mt at 33.4 cpht for 0.54m carats and a Mineral Resource of 4.5Mt at 28.7 cpht for 1.3m carats. Frontier Diamonds also owns the Bellsbank Exploration Project and the Tailings Reclamation Project, both situated adjacent to the Sedibeng Diamond Mine.
Catalysts: Frontier secured a total funding of $3.6 million to fast-track bulk sampling programs and its efforts to achieve full production at its operating mines. The Company recently reaffirmed its prospectus guidance to deliver a maiden profit in FY19. Star and Sedibeng witness increasing production and are on track to run at full capacity in H2 CY2018, like the recent introduction of Sub Level Retreat Mining techniques drives greater throughput at increased grades. A mine life extension for Sedibeng is supported by recent diamond discoveries at the adjacent Bellsbank license, where feasibility studies investigating the potential secondary ore source have commenced.
Hurdles: Despite the recently completed capital raising, Frontier remains reliant on external capital and there is no guarantee it can procure the necessary funding required to further advance its mining and exploration projects. Frontier has failed to achieve prospectus targets resulting in a sharp decline in the value of its share since the IPO and management has yet to demonstrate its ability to unlock value from its assets. Operations incur a high level of fixed cost and failure to meet production targets or forecasted sales would adversely impact the Company’s financial position.
Investment View: Frontier offers speculative exposure to diamond industry trends through a portfolio of operating mines in South Africa. Performance over the past year was disappointing with production adversely impacted by mine development and infrastructure expansion at Star and Sedibeng. Risks include reliance on external capital, diamond price volatility, and its high fixed cost operations. Management is confident that mine upgrades and a progressive move towards Sub Level Retreat mining techniques will see Star and Sedibeng return to nameplate production during FY19 and beyond. The recently secured funding alleviates balance sheet pressure and enables the Company to enlarge and accelerate its bulk sampling program, whilst at the same time deliver significantly higher throughput at its operating mines. We initiate coverage to monitor Frontier’s turnaround potential and upcoming appraisal of Bellsbank.
THE BULLS AND THE BEARS
THE BULLS SAY
- Frontier secured a total funding of $3.6 million to alleviate balance sheet pressure and accelerate efforts at Bellsbank, Star, and Sedibeng
- Frontier is on track to significantly increase production at its operating mines, as the recent introduction of Sub Level Retreat Mining techniques drives greater throughput at increased grades. The mines are expected to run at or near full capacity in H2
- There is potential for a resource upgrade. The Company has improved ore body knowledge as part of mining activities in previously underexplored areas of the
- Given the fixed cost nature of its operations, there is potential for the incremental rise in revenues if diamond prices appreciate. Diamond markets have recently shown signs of
- Frontier is conducting exploration activities adjacent to Sedibeng, which may offer upside to the stock
THE BEARS SAY
- Despite the recently completed capital raising, Frontier remains reliant on external capital and there is no guarantee it can procure the necessary funding required to further advance its mining and exploration
- Frontier has failed to achieve prospectus targets resulting in a sharp decline in the value of its share since the IPO and management has yet to demonstrate its ability to unlock value from its
- Frontier’s operations incur a high level of fixed cost and failure to meet production targets and achieving a sales price within a specified range would adversely impact the Company’s financial performance
- Global diamond prices are volatile and declining prices could negatively impact the economic value of Frontier’s mining
- The Company invests money and resources into its exploration projects and there is no guarantee that an economically viable resource can be delineated