Kimberley Consolidated Mining (KCM), a junior diamond miner, explorer and developer made a sparkling appearance. Its share price soared by 11% as it listed on Johannesburg’s alternative exchange (AltX).

For South Africa it’s – what commodities boom?

Still, the economic outlook remains gloomy in the southern hemisphere.

According to Statistics SA, South Africa has “seriously missed the commodities boom”. It reckons the mining sector’s contribution to first quarter GDP plummeted some 22%.

Of course everyone expected the mining sector to shrink what with the power crisis, not to mention safety issues and violence against migrant workers. But even economists didn’t think it would be that bad. Most predicted a 10% fall.

Gold, platinum and diamond producers – South Africa’s worst performers – are to blame. They’ve not been producing enough precious material!

Platinum production was down 15% in the first quarter year-on-year… gold was down 19% and diamonds 18%. This was a major reason for South Africa’s economy growing just 2.1% versus 5.3% in the previous quarter.

So, South African miners are trapped in a recession in the middle of a commodities boom. Most lay the blame for this at the door of Eskom, the state electricity supplier. But other reasons are beginning to emerge…

The reserve bank’s efforts are one — it’s trying keep inflation between 3% and 6% at a time when the oil price is going through the roof. This means the bank was forced to hike interest rates to keep inflation within its target. Propping up the currency is another move that has caused many miners to move their production boosts — they’ve gone offshore!

Then there are the new mining regulations. While they came into force as long ago as May 2004, they’ve taken some time to implement. And, of course, new royalty payments came into affect this year. This was the subject of heated debate between the mining industry and the government.

Now, it looks like things are about to get worse…

Electricity supplies may have been stabilised, but winter is on its way. Domestic consumption is expected to rise. More stress on the system does not bode well for its major mining users.

Still, there are gems down there…

You can’t blame South African miners for downing their tools and investors for making for the exit!

But the little newcomer shows that there are still gems in there.

In spite of fears about prospects in South Africa, KCM still managed to arouse a lot of interest when it listed on the JSE’s AltX. Even as Statistics SA announced the mining sector’s demise, the first day’s trade in KCM saw its share price soar.

So what has KCM got going for it?

CEO Hein Le Riche reckons there is massive demand for high quality gem diamonds. And there is a lot of promise in KCM’s prospects. The company’s two main mines (Bo-Karoo and Taung) are on the Orange River. This territory is famous for large high value gemstones.

Mining at Bo-Karoo kicked off in mid-2005. Between then and now the mine has produced an average of 250 carats a month. For the year ending 2009, the mine is forecast to produce 4,840 carats, rising to 6,000 the following year.Bo-Karoo has “indicated” diamond resources and more certain “probable” diamond reserves of 25,490 carats.

Already the mine has produced some significant white and coloured sparklers – a 98 carat stone in 2006 and a 123 carat stone in 2007. The latter went for $22,000/carat. Then in April this year a 46 carat blue-white stone sold for an impressive $28,000/carat.

At its other alluvial mine, Taung, 3657 carats of diamond have sold for an average of US$751/carat. Better still, 90% of these diamonds are of gem quality and 40% are bigger than one carat stones. A 42 carat Cape yellow diamond from Taung sold for US$918 per carat.

Then there is The Carter Block in the Northern Cape Province near to one of De Beers mines. Here there are known kimberlite pipes – the other type of diamond mining that takes the form of an open pit. There are also alluvial deposits.

KCM has entered a joint venture on this with JSE listed Trans Hex, a company that has kimberlite mining expertise. While this mine is still in the exploration phase, prospects have been judged good enough to begin bulk sampling.

Exploration is also underway at Batloung, another area in the Northern Cape where KCM holds mining rights.

The company may raise capital to fund the development of these Kimberlite prospects particularly the one at Carter.

…and prices are rising for its gems, not just KCM shares

All in all, it sounds as though Mr Le Riche’s confidence is justified.

In two years KCM and its subsidiaries produced more than 12,000 carats. These, he said, sold for more than R120m (just under £8m). In February alone Bo-Karoo and Taung produced more a 1000 carats. These brought a gross income of more than R10m.

Since 2005, KCM has sold diamonds worth R150m. Come February 2009 the company expects to generate an annual R91m in sales. It has already achieved a third of that this year!

Even KCM has underestimated the buoyancy of diamond prices. In its pre-listing statement it said average prices would be around $1900/carat, but that has already shot to $2400/carat.

And Mr Le Riche reckons demand is strong enough to push prices higher still. That means KCM is not limiting itself to South Africa. It has plans to enter Sierra Leone, Angola and Lesotho, too.

One word of warning though! Diamond stocks have been the worst performing of resource stocks.

Still, KCM is already ahead of its revenue targets for this financial year by 30%. It has profits of R4.5m forecast for February 2009. By the end of 2010, the company is forecasting profits of R30,5m.

Even better news! It is talking of paying dividends to shareholders. That would make it the first AltX mining company to do so. And it could send the share price higher!

So, if all goes to plan, this one could be just be a glimmer of light in the South Africa’s darkness.

Keep exploring,

Erin and Isabel

By Erin Hamilton and Isabel Turner,
First published on Wednesday, June 04, 2008

Source: Junior Diamond Miner And Explorer KCM Makes A Sparkling Appearance

Take bananas a few years ago. One day you could walk into a store and buy them cheap. A few cyclones in Queensland later, and banana prices were through the roof. For most share investors, this wasn’t an opportunity. It just made bananas and banana bread more expensive.

But in other markets – especially resource and energy markets – a sudden change in the availability of basic resources can change everything. A commodity can go from abundant to scarce relatively quickly. Its price can go from cheap to expensive quickly as well. Naturally, the share prices of companies that produce volatile commodities can change quickly too. We’re counting on that this month.

The Leading Edge of the Energy Storm

The high cost of energy – especially coal and oil – is directly impacting resource production in two countries: South Africa and China. As energy prices grind higher – or even hold where they are – this will force the production of certain base metals to lower-cost countries. It will also change the supply-demand dynamic for these base metals, creating new investment opportunities in the process. A good example is South Africa.

You have no doubt read about the power crisis in South Africa. South Africa has a booming resource economy like Australia’s. It’s driven by gold, palladium, platinum, coal, diamonds and other resources.

The trouble is, South Africa’s economy is growing faster than its electrical industry. Contrary to all the gloomy reports, we found the place pretty positive when we visited in late February (mostly Johannesburg). Like any fast growing country starting from widespread poverty, you’re going to have a lot of chaos, crime and uncertainty.

But one of the few things you want to be able to count on is the power. You flick a light switch, the lights go on. That’s so basic that you and I take it for granted. Not so in South Africa. The folks who run South Africa’s only large power company told the government years ago that it would have to invest more in power to keep up with the economy’s growth. The government didn’t listen.

The result is what you have today: rolling blackouts and “load shedding” by the power provider. Demand for power has grown much faster than the available supply. This is not make-believe land. When demand exceeds supply something has to give, and in South Africa, that means power must be cut to someone.

Energy-Intensive Industrial Users on the Chopping Block

The government’s first response to the power crisis was to cut supply to the places that used the most of it, namely the suburban business parks where most of Johannesburg’s business community has relocated in the last yen years. That makes sense. You can only cut power to people who are using it. But cutting power during the middle of the business day unexpectedly is not exactly good for business, or for people’s state of mind.

The government decided to look at industrial users of power. And once it did that, it wasn’t going to be long before South Africa realised – like China is now realising – that there is one particular industrial process that uses much more energy than any other: aluminium.

You make aluminium in several steps. First, you have to refine bauxite ore into alumina. Then, you turn alumina into aluminium by adding generous amounts of electricity in an established process. I won’t go into the details. But the basic ingredients are what we want to focus on: bauxite and energy.

Bauxite is plentiful. You can find it all over the world. Australia happens to have plenty of the stuff. But it is not alone.

Australia is the Saudi Arabia of Bauxite

Forget the UK blues you had on Monday. Don’t despair
about your pension fund value. The credit crunch is
over. Stock markets are now doing what they do… and
going up.

Certainly, that’s how it seems when you look at
yesterday’s phenomenal surge around Western stock
markets… and the continuation across Asian markets
today.

——————————
Markets across the world rally
——————————

Yesterday, the Dow Jones closed up some 400 points, the
FTSE was up 150 points and today in Asia the euphoria
continued unchecked: the Japanese Nikkei up 4.2%, Hong
Kong up 3.5% and India up 2.2%. In Latin America,
Mexico added 2.8% and Brazil 2.9%.

All of this comes on the back of yesterday’s news of
over $23 billion in write-downs. The market, in its
infinite wisdom, thinks that just because banks can
still go to the open market for funds that this credit
crunch is over somehow.

Last time we checked, foreclosures are still rising,
consumers are spending less and banks continue to write
down billions.

The huge rally, then, in banks and retailers
(Kingfisher and B&Q were among the FTSE’s leading
risers yesterday!)… in fact, in just about
anything… seems like some kind of April Fool’s joke –
especially when you consider that about the only shares
falling were mining companies.

I was talking to Robin Tracey who runs our Time Trader
straddle strategy earlier. He has is own thoughts on
this recent rally. “I think it’s just that traders had
been beaten down for too long – the pessimism was
overdone. As soon as we got a bit of “good news” from
the finance sector, the bulls took their cue and a bout
of optimism has blasted in to the market,” he told me
on the phone earlier.

——————————

—————-
Just a short squeeze… or a meaningful rally?
———————————————-

Will that optimism last, I wanted to know… asking
Robin to look into his crystal ball and give me a
definitive answer on where I should place my chips.

“Who know? Not you and certainly not me,” he replied, a
little too honestly perhaps. “This could be either a
severe bout of ‘short covering’ or it could be a
serious “upside initiation”, in other words the start
of a bigger rally. It doesn’t feel like the latter to
me, but I’m afraid we’ll have to wait and see.”

OK, Robin – so the markets could go up… or they could
go down. Thanks for that! Actually, Robin doesn’t care
too much about that. His strategy is market neutral. In
other words, he does not try to guess direction –
that’s a mug’s game in his view. People are invariably
wrong and “most of the time” markets don’t move that
much from month to month. His fascinating strategy aims
to capitalise on that.

The doors are closed on this service for this month’s
trade – but as soon as Robin’s inviting new traders to
join the May trade, I’ll let Profit Watch readers know
first. It could be your kind of thing. Keep an eye out
next week.

———————————
Lots of action in oil and gold…
———————————

Meanwhile, there’s just as much volatility over in the
commodities complex, where we’re still in the throes of
a sizeable volte face in the gold market.

Here in Profit Watch I’ve been musing for a while on
whether that thrust we saw through $1,000 dollars an
ounce would stick… or whether we’d get a decent
correction. Having a rudimentary understanding of
technical analysis, I had $750 in my mind as a possible
retracement level… a possible buying opportunity.

Well clearly we came nowhere near that… but the
market is certainly giving latecomers to the party a
reason to start thinking about jumping in… what do we
make of that?

If you’ve been reading this thing for a while, you know
me. I’m a gold bull over the longer term. I’m not
necessarily a gold bug like some of my colleagues –
Fleet Street CEO, Bill Bonner, William Rees-Mogg at The
Fleet Street Letter or Dan Denning who heads up the
Australian version of our Daily Reckoning letter. These
guys believe gold is the only true store of value in a
depression and they’ve been calling it upwards for the
last 10 years or more… and rightly so.

As inflation rages, gold shines… and that’s what
we’ve been seeing in 2007 and 2008. At its $1,030 high
of a couple of weeks ago, gold was up 23% since the
start of the year.

But I note from Ben Traynor’s Fleet Street Daily email
today that we’re seeing a decent pull back now…

————————————
Gold falls, but oil stays above $100
————————————

Gold is down to $888, he tells me in his excellent
commentary (you should sign up for that if you get the
chance, by the way – see the link at the end of this
email.) But oil has stayed above the magic $100 mark
(excepting a short spell yesterday when it poked its
nose just below for old time’s sake).

“I find it interesting that gold fell but oil didn’t,”
muses Bill Bonner. “Oil has real demand behind it,
while gold is monetary.”

“Absolutely,” agrees Garry White. “You make loads of
stuff from oil. Plus,” he adds, “there’s a real supply
crunch going on. We all seem to focus on US oil
inventories, but we should be looking at capacity in
producing nations too.”

The Gulf is experiencing a power crisis, and it’s
hitting production capacity.

“The fundamentals are in the driving seat now!” says
Garry. “And the fundamentals are tight.

“A US energy economist has a neat explanation as to why
this is happening – and it fits exactly with my view of
the world. It’s all about population growth leading to
energy shortages – and he believes it’s hitting oil-
producing nations hard.

“Writing in the Financial Times, Ohio Northern
University Energy Economist AF Alhajji, said that
Opec’s vanishing excess capacity was now keeping the
oil price above $100. He argued that Gulf States’ power
crises were now a primary driver of the oil price.

—————————————
Gulf power crisis is real – and growing
—————————————

“Alhajji argued that when considering total oil stocks,
you must include inventories in industrial nations PLUS
excess capacity in producer states. We all seem to
focus on US oil inventories – be we should be looking
at capacity in producing nations too.

“Despite rising inventories; vanishing capacity in Gulf
nations makes total global oil stocks so small that
this has been the main driver keeping the oil price
above $100, he argued.

“So, based on this analysis, when we are considering
global oil stocks, oil EXPORTS from these countries are
the most important factor – NOT total oil production.

“Rising living standards, soaring populations and
urbanisation is increasing demand in oil-rich nations.
They are using their own oil to supply their soaring
energy needs. This would also explain why Opec has been
reluctant to increase production… it simply can’t
because of its own power shortages.

“In March, the Middle East Economic Digest warned of an
imminent power and water crisis across the Gulf. It
said there was a serious supply and demand imbalance
caused by a lack of infrastructure investment earlier
in the decade.

“The GCC is currently building a Gulf power grid that
will connect the six member states, paving the way for
a regional electricity market. The grid will not come
online until 2009, however.

“So, a temporary change in the dollar’s fortunes has
revealed that fundamentals are taking over as the main
driver.”

Garry’s advice? Buy commodities – and oil in
particular. If you’re looking for his specific profit
plays, then just get on board his Smart Commodities
letter.

To find out why oil is one of Garry’s Power Trends – 5
trends that could see smart investors make an absolute
killing in the months ahead, read here:

http://click.fspeletters.com/t/15025/1632470/156272/0/

Past performance is not a reliable indicator of future
results. Your capital is at risk when you invest in shares,
never risk more than you can afford to lose. Please seek
independent financial advice if necessary.

That’s all for today…

Until Friday…

Best regards,

Frank Hemsley
Profit Watch

P.S. Remember to get your name on to the list for Ben
Traynor’s Fleet Street Daily e-letter (it’s free!) Just
go here for details:

http://signup.fspinvest.co.uk/LF/fsd.html?newsourcecode2=XFSDD304