DiamondWorks remembers its dead, in silence

DiamondWorks remembers its dead, in silence

Will Purcell, Stockwatch Street Wire (Canada)

November 11 2003

Antonio Teixeira's DiamondWorks is posting strong profits from its oil supply business and is now reviving one of its diamond projects that should help the company's bottom line further still. The new profits come just five years after a pre-dawn attack at the company's Yetwene mine left several DiamondWorks employees dead and missing, despite what was supposed to be a ceasefire in Angola's long-standing civil war. For a time, DiamondWorks seemed destined to suffer the same fate as its unfortunate employees, but things have been much rosier of late for the company and its shareholders, as a series of recent deals have proven quite profitable. Sadly, things have been decidedly dismal for the families of the four employees who remain unaccounted for to this day. Although the authorities in three countries and the families now concede that the men are dead, their survivors are still waiting for a final settlement in accordance with the terms of the employment contracts, exactly five years after the strike on Yetwene.

Through the first three quarters of 2003, DiamondWorks has reported a net income of nearly $12-million (U.S.), on the strength of sales of just under $134-million (U.S.) over that stretch. Compared with the first six months of the year, things were not quite as rosy in the latest quarter, but that apparently was due to what DiamondWorks thinks are temporary problems with its Zambian oil supply arrangement. Despite the difficulties in negotiating a renewed Zambian deal, the company still managed to post a profit of $50,000 for the latest three months, and that is the fifth consecutive quarter that DiamondWorks managed to finish in the black.

That is quite a turnaround for a company that nearly bled to a financial death in the dark days that followed the rebel assault on Yetwene, and also in the three years that preceded the attack. In the three years prior to the end of November, 1998, DiamondWorks reported a cumulative loss of just over $53-million (U.S.), and added another $54-million (U.S.) loss in the three years that followed the Yetwene murders and kidnapping, which cost the lives of several men and nearly unravelled the company.

The steady stream of losses cut deeply into the book value of the company, which recorded its shareholder equity at just over $38.2-million (U.S.) just three weeks after Yetwene, late in 1998. Two years later, the figure had shrunk to a mere $4.7-million (U.S.), despite the addition of more than 110 million new shares through private placements and debt conversions. To make matters worse, the figure was later revised to indicate that DiamondWorks actually had $2.1-million more in liabilities than it had assets at the end of its 2000 fiscal year.

DiamondWorks has had quite a transformation since those dismal days, and the book value of the company has grown rapidly over the past few years as a result, falling just short of $30-million (U.S.) a year ago. In fact, the $44-million (U.S.) book value that the company reported at the end of August is now higher than the level recorded late in 1998, just after the Yetwene attack.

The new prosperity makes the delay in bringing some finality to the Yetwene tragedy a painful wait for the survivors of the four men now presumed to be dead after nearly five years of silence from the perpetrators of the attack. The key part of any settlement is a provision in the employment contracts of the men, which entitled them to a life insurance policy that would pay an amount equal to five times their basic annual salary at the time of their death. Those contracts had been signed with Branch Energy Ltd., a wholly-owned subsidiary of DiamondWorks.

In its 2000 and 2001 financial documents, DiamondWorks acknowledged the matter of the missing men, stating that provision had been made in its financial statements to cover the liability that might arise in the event that the missing men, or their next of kin, were to make a claim against the company in accordance with the employment contracts. Curiously, the financial statements for the most recent year no longer contain such an acknowledgment, nor any mention of subsidiary Branch's obligations.

One of the complicating factors has been the series of management changes that have taken place through the years, as DiamondWorks struggled to stay alive. The company had initially been created from Carson gold in the mid-1990s by Eric Friedland, with his brother Robert Friedland a significant shareholder, but by the time of the Yetwene attack it was Branch's Tony Buckingham who was wielding the boardroom clout, through his voting control of nearly one-third of the company's shares.

The shares of DiamondWorks had peaked at $3.06 early in 1997, just months after the company shed its Carson Gold moniker, but the promotion lost much of its glitter with investors, and a share cost 50 cents by the fall of 1998. The mounting woes triggered by the Yetwene attack took a much greater toll on the stock, and a share cost just one sad cent by late 2000.

DiamondWorks went through a series of dramatic changes, as the company's need for new cash combined with its shrinking share price led to more changes of control. Brian Menell's Ekuseni Resources was the first to take a crack at rescuing the hapless Angolan diamond miner, but it was not until Tony Teixeira's Lyndhurst arrived on the scene that DiamondWorks managed to reverse its flagging fortunes, starting with a 1-for-20 rollback, followed by the company's acquisition of Mr. Teixeira's Otterbea International, which put DiamondWorks into the oil supply business.

DiamondWorks director, Delu Holender has been one constant over the past decade. He was appointed to the company's board in 1994, when he sold a number of Venezuelan gold properties to the company, back in the Carson Gold days. Nothing much came of the gold projects and Mr. Holender has always appeared to be an outsider on the board, but he has managed to cling to his director's chair through the series of changes, and he has remained a believer in the company's prospects, continuing to participate in private placements over the years. That dogged determination now seems to be paying off for Mr. Holender, as the new-found profits of DiamondWorks are a pleasant switch after the years of big losses, but the lingering Yetwene matter remains a dark blotch on his company's improving record.

Nevertheless, Mr. Holender seems hopeful that the matter will soon be settled. "We are in the final stages of discussion with the insurer to bring the matter to an end," he said. "I believe that the matter will now be settled on this basis and we can then close this chapter in the company's history before year end," he added. Mr. Holender stated that the company's insurers had just agreed to make a without prejudice offer to all of the families of the missing persons, in a full and final settlement of all claims that they may have, adding that they were now awaiting replies.

Karen Larsen, the wife of kidnapped metallurgist Doug Larsen, said that the families still had not received any offer from the insurer, or from DiamondWorks, although the presumption of death certificate for Mr. Larsen had been obtained in September of 2001, and the documents for two others, Wenefredo Amoguez and Roberto Bautista, had been obtained from the Philippines in early 2002.

Although it has been Mr. Teixeira's oil supply deals that have rescued DiamondWorks from the brink, the company still fancies itself as a diamond miner, with plans to place its Koidu property into production through the help of its equal partner, Magma Diamond Resources. The Koidu No. 1 pipe has been explored and sampled since the 1950s, while work on the No. 2 pipe and the dike zone began in the 1960s. About 165,000 tonnes of material are believed to have been mined from the No. 1 pipe, which averaged about 0.56 carat per tonne, along with nearly 110,000 tonnes from the second pipe, which yielded diamonds at an average rate of 0.24 carat per tonne.

Despite the previous sampling and mining programs, there is still some uncertainty about the grade of the Koidu kimberlites, and that could give the project an added boost. The most recent resource statement indicated that the No. 1 pipe contained a resource of nearly 1.7 million tonnes of kimberlite, with an average grade of 0.67 carat per tonne, or about 1.13 million carats. The No. 2 pipe holds about 3.15 million tonnes of rock, with an average grade of 0.28 carat per tonne, or about 870,000 carats. That latter grade estimate could be low however, as an earlier estimate pegged the diamond content at about 0.40 carat per tonne. The lower value appears due to an abundance of granite xenoliths and poor plant recoveries.

DiamondWorks plans to revise its resource estimates for Koidu in the coming months, and the company has high hopes that the actual grade at No. 2 will be significantly higher, as the amount of waste material embedded within the kimberlite appears to diminish with depth and its new plant should prove to be quite efficient. DiamondWorks also thinks that the amount of kimberlite at Koidu could be understated, based on the results of its latest delineation drilling program at No. 2. As well, there also appears to be a significant resource in the dike zone at Koidu, which also appears to be economic, and additional work in this region could add to the Koidu resource.

There is also some uncertainty about the value of the Koidu diamonds, although there seems to be little doubt that they are top quality stones. The diamonds from the No. 1 pipe could be worth something between $200 (U.S.) and $300 (U.S.) per carat, which would place the gross value of the Koidu No. 1 pipe at roughly $250-million (U.S.). The value of the diamonds in No. 2 remains an unknown quantity, although there are signs that they will carry a lower value than the No. 1 stones. Nevertheless, the Koidu project could add sparkle to DiamondWorks' new-found oil profits.

As well, DiamondWorks still hopes to revive some of its other old diamond projects. Mr. Holender said that its other gem projects were still on hold, due to the busy pace at Koidu, but the company would be returning to the other regions in due course. That could mean a return to its exploration efforts in the Central African Republic next year, he added. Mr. Holender also said that the company was maintaining contact at the political level in order to preserve the legal status of its projects in Angola.

Meanwhile, like Mr. Holender, Ms. Larsen and the other families also seem willing to close the sad chapter in the history of DiamondWorks, although they may have a completely different notion of just what a full and final settlement might be, after their five-year wait and the company's string of profitable quarters. Ms. Larsen said she would evaluate any formal offer and then decide whether to accept the settlement, or to sue for breach of contract. Nev Pope, the mother of geologist Jason Pope, is also becoming frustrated with the wait. "Not only am I seeking, on behalf of all the families, what is due according to the men's employment contracts, but interest to compensate the families for the hardships they've endured," she stated. Ms. Pope added that she was prepared to sue and freeze the company's assets in Sierra Leone, and the Koidu diamond mine would likely be high on her list.

DiamondWorks closed down eight cents on Monday, at $1.24.