DiamondWorks morphs into Energem

Vancouver-based DiamondWorks was one of the more controversial diamond producers of the late 1990s, operating two rich mines in Sierra Leone and Angola until both operations were overwhelmed by civil strife and the company was pushed to the edge of oblivion in 2001.

The company’s present-day controlling shareholder, Lyndhurst Ltd., entered the scene in 2001, diluting the old shareholders to below 1% and installing new management into what was largely a moribund mining and exploration company.

Since that time, DiamondWorks (recently renamed Energem Resources [DMW-T]) has rapidly become a diverse natural resources company that has only 25% of its business related to diamonds, and the rest mostly concerned with oil and gas.

“Over the past three years, we’ve created a unique platform for accessing the wealth of Africa on behalf of our shareholders,” says Energem Chairman Brian Menell. “And we’ve just changed the name to reflect our much greater diversity of activities — we’re carbon to carbon; diamonds to oil.”

In addition to Menell, the new management includes Sheikh Hasher Maktoum Juma Al Maktoum (vice-chairman), Anthony Teixeira (president and CEO), Robert Rainey (CFO), and James Kanakakis (vice-president legal and corporate affairs).

The controlling shareholder remains Lyndhurst, but it has been diluted down to 41% as a result of more than US$30 million in financings in the past half year, primarily from U.K. and European institutions. Other major shareholders are: Anglo African Holdings, with a 9% interest; Capital Research, with 6%; RAB Capital, with 3%; and JP Morgan Fleming, with 3%.

“All the personalities of the old DiamondWorks have had nothing to do with the company for four or five years,” says Menell. “There are some nice stories about the old DiamondWorks, with mercenaries and stuff, but that’s all completely irrelevant and has no relationship with any aspects of Energem Resources.”

Energem is now divided into five operating divisions: mining and mineral exploration; mid-stream oil; up-stream oil; manufacturing, logistics and supply; and commodity trading.

The company has almost 1,000 employees spread across 12 central African countries: Sierra Leone, Nigeria, the Central African Republic, Sao Tome, Gabon, the Democratic Republic of Congo, Angola, Zimbabwe, Zambia, Malawi and Kenya. The company also has offices in the suburbs of Johannesburg, South Africa.

In 2003, the company made $12.1 million in profits (19 per share) on revenue of $153 million, compared with the $10.1-million profit on $86 million in revenue reported for 2002. There was no mining revenue in 2002 or 2003, since the first diamond sales from the reactivated Koidu mine in Sierra Leone were carried out in early 2004 (see separate story, page B1).

Energem’s numerous oil and gas assets are highlighted by an oil-product importation licence and potential pipeline in Malawi, a 55% interest in a new ethanol plant in Kenya, and oil-production projects in the Gulf of Guinea and Sao Tome.

Energem’s mining assets are in three countries:

— Sierra Leone — The company has a 40% interest in Koidu Holdings, which operates the Koidu mine and has several exploration licences.

“Koidu has incredibly attractive production,” says Menell. “It’s a high-margin, high-value kimberlite project, of which there are few in the world.”

As for operating in war-scarred Sierra Leone, Menell isn’t worried. The country is “totally stable and secure at the moment as a result of the U.N. and U.K. engagement,” he says, adding “we believe it will persist, and we’re quite happy with the situation.”

— Central African Republic — Energem has two subsidiaries, CADCO and CAMCO, that control a diamond-buying licence and six alluvial diamond concessions covering more than 11,500 sq. km.

A force majeure instituted by Energem in response to a coup in the CAR in March 2003 was lifted two months ago, and the company is now mobilizing a team to resume sampling in the licence areas.

— Angola — The company has a 48% stake in the Luo kimberlite and alluvial operations and a half-interest in the Yetwene alluvial mine. Both assets were brought into commercial production by the old DiamondWorks, yielding a total of 200,000 gem-quality diamonds between 1997 and 2001.

In November 1998, an armed band of 50 men attacked the Yetwene mine, leaving eight dead and 16 wounded. The company shut down all its Angolan operations in 2001, and they remain closed to this day.

“There’s stuff there we own, but it’s not in working order,” concedes Menell.

In addition, four senior managers were kidnapped during the attack; they were never found and are presumed dead. Their surviving families have accepted life-insurance payments.

Energem is seeking to renegotiate its original agreements in Angola, which Menell describes as having been “highly undesirable” in commercial terms.

“We believe we can do a lot better, and we won’t go back unless we get that,” he says.

Furthermore, Menell says Energem has an interest in expanding into mining projects other than diamonds, and is eyeing a couple of opportunities.

“Our focus is not on exploration; it’s on projects that have the potential to generate sustainable earnings in the short-to-medium term,” he adds.

Energem can now carry out its own commodity trading through its acquisition, in April 2004, of a 60% interest in the Swiss-based firm Republic House. Commodities traded include copper, cobalt, nickel, zinc and precious metals, and Energem has just added an oil trading desk.

“It’s just the beginning of our vision of creating a substantial, sustainable and high-earnings-generative African natural-resources company,” says Menell.

Asked if Energem might be a good takeover candidate, Menell responds “we’re not a natural takeover target; we’re a natural break-up target.”

He says “different elements of our business would be desirable for larger companies that want to be in Africa but don’t want to do the work and go through the processes that we have.”

But, he says, “our intention is to maintain and grow our platform because we believe it works. Down the road, we may unbundle our mining assets if that’s what our shareholders want, but we have no intention of doing that in the short term.”

Menell predicts that Energem’s mining business will grow “quite quickly” but that over the next two years the oil business will grow “even more quickly.”

With a solid cash flow projected in the medium term, Energem does not plan to raise any more money or issue more shares in the coming months.

For now, any excess cash flow will be ploughed back into the company’s slate of development projects, says Menell, who adds he “would like to see dividends in, say, 2006, but until that time, shareholders will benefit by the appreciation of the stock in the market.”

Energem has 101 million outstanding shares plus 21.3 million outstanding warrants exercisable at an average of $2.03 within two years.

Shares last traded at $2.35. They briefly spiked at a multi-year high of $3.85 in February 2004 and have been in modest decline since then.



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