Post on 12-Sep-2021
This research in non-independent and is classified as a Marketing Communication under FSA
rules. As such it has not been prepared in accordance with legal requirements designed to
promote independence of investment research and it is not subject to the prohibition on
dealing ahead of the dissemination of investment research. Further important disclosures are
contained in the disclaimer at the end of this document.
We estimate that FY 2010 management guideline production of 2.2 million
carats of Tanzanite will result in a return to profit after tax of US$ 1.44
million. We expect this to be a catalyst for a re-rating of the company’s
valuation towards our GBP 0.50 price target. With a low Capex requirement
and a growing future cash pile, we believe TanzaniteOne is returning to a
prodigious cashflow profile with healthy dividend paying fire power.
Furthermore we expect the company’s valuation to improve following the
recent re-rating of comparable coloured gemstone miner Gemfields plc
(AIM:GEM).
Driving this return to profitability includes; Changes to the mining system, leading to
better resource management, combined with an 18% Y-o-Y improvement in
recovered grade to 59 carats per tonne (our valuation model assumes a long term
grade of 55 carats per tonne), resulting in reduction of production costs.
The recent recovery of a 12,100 rough carat Tanzanite, discovered at a newly
intersected high grade fold structure, is the third largest high quality Tanzanite
gemstone ever mined at the Merelani Mine and will add to the cash pile.
We anticipate the successful awarding of the requisite Environmental Approval Certificate
within the next month, securing a further extension to the 25-year Special Mining Licence
(“SML”). Tsavorite resource development at Lemshuku – Shamberai adds further value to
the future gem product range. An additional resource update is expected in Q2 of 2011.
Valuation: We value TanzaniteOne on a 20 year Life-of-Mine Discounted Free Cash
Flow model. Our production forecast front loads the major portion of the tonnage
against a number of different scenarios within the models first 12 years. At a base
case scenario we calculate a NPV of US$ 92.0 million at a 10% discount rate, which
translates to a share price target of GBP 0.50 per share and initiate coverage with a
BUY recommendation.
Table 1: Earnings Forecast
Merelani Units Dec 10 F Dec 11 F Dec 12 F
EPS GB pence 0.84 2.91 3.65
PE Ratio Ro. 11.90 3.44 2.74
Source: XCAP Securities PLC
16 March 2011
XCAP Securities UK Equity Research Mining
BUY Target Price 50p
Share Price 10p
TanzaniteOne is the world’s leading
producer of ethically mined Tanzanite
that is completely traceable from
mine-to-market via the company’s
dedicated minesite cutting and
polishing centre in Tanzania.
.............................................................
Ticker ............................................. TNZ
Shares (m) ................................. 115.64
M.Cap (GBPm) ............................ 11..42
Cash (US$ m)………………………………1.72
Life-of-Mine ............................ 20 Years
2004 SAMREC Resource .......................
Indicated ........ 0.95 Mt for 63 M carats
to .................... 1.26 Mt for 83 M carats
Source: TanzaniteOne Ltd
Source: FactSet
Analyst Austin McKelvie
+ 44 20 32 16 26 34
austin.mckelvie@xcapgroup.com
Sales
Tim Burge
+ 44 20 32 16 26 29
tim.burge@xcapgroup.com
John Grant
+ 44 20 32 16 26 60
john.grant@xcapgroup.com
TanzaniteOne (AIM:TNZ) Deep Blue Wonder
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 2
Executive Summary
TanzaniteOne Limited (“TanzaniteOne”) is a Bermudian registered holding
company listed on the AIM Market of the London Stock Exchange. The
company is the world’s leading producer of ethically mined Tanzanite, a rare
and precious blue–violet gemstone of the zoisite group of minerals.
TanzaniteOne operates the Merelani Mine where it holds both a Special
Mining Licence and prospecting licences. The Merelani Mine is the world’s
only known and finite source of Tanzanite, situated in the foothills of Mount
Kilimanjaro, within the Simanjiro district of North Eastern Tanzania.
Corporate Structure
TanzaniteOne Ltd Gemfields PLC 10% (AIM:TNZ) (AIM:GEM)
Largest Shareholder
100%
75%
TanzaniteOne Mining TsavoriteOne Mining
Merelani Mine
Lemshuku-Shamberai Tsavorite Project
Tanzanite Mine Tsavorite Project
Special Mining Licence 12x Prospecting Licences
Mine-to-Market 100 square kilometres
Polishing & Cutting Centre Potentially Largest Known Single Source
SAMREC Code JORC Code - 2004
Isoclinally Folded Orebody Alluvial Gravel Deposit Covers 50% of Project
63 to 83 million carats 1.4 to 3.5 million carats
Indicated: - 0.89 to 2.17 M bcm @ 1.6 cpt
Inferred: - 7.6 to 10.4 M bcm
Blue-Violet Zoisite Superb Flashing Green Gemstone
Brilliant Green Gemstone Grossular Garnet
Quality for Quality Market Price 2 to 4x Tanzanite
Source: TanzaniteOne Ltd, XCAP Securites PLC
Production of Tanzanite from the Merelani Mine is sourced via six shaft
systems. Tonnage is called from an orebody consisting of tight isoclinally
folded stacks containing calc silicate boudins, which have been further cross
folded and plunge at 45 degrees to a north west cross fold. Mineralisation of
Tanzanite has been precipitated as the result of retrograde metamorphism
during fluid migration. Tanzanite’s rarity is attributed to the Merelani Mine
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 3
being the single known source of supply, which is a limited and finite
resource.
The current resource statement for the Merelani Mine, presented within the
Competent Person’s (“CPR”) Report by Ddraig Mineral Developments Ltd for
the AIM listing in August 2004, was calculated in accordance with the
SAMREC guidelines for a diamond resources. The CPR outlined an Indicated
Resources of Tanzanite at between 0.95 million tonnes for 63 million carats
to 1.26 million tonnes for 83 million carats.
Table 2: Forecast Tanzanite Production
Merelani Units Dec 08 Dec 09 Dec 10 F Dec 11 F Dec 12 F
Processed Tonnes 42,318 38,154 37,288 36,250 37,500
Tanzanite MCPA 2.20 1.91 2.20 2.28 2.29
CAPEX US$ m 5.65 4.73 3.00 3.75 3.50
Sales US$ m 26.90 12.46 15.40 18.27 20.02
EBITDA US$ m -4.70 -1.16 4.00 8.03 11.73
PAT US$ m -8.36 -2.42 1.44 5.02 6.29
FCF US$ m -23.77 -2.60 4.83 8.95 10.00
EPS GB pence 0.84 2.91 3.65
PE Ratio Ro. 11.90 3.44 2.74
Source: TanzaniteOne Ltd, XCAP Securities PLC
We value TanzaniteOne on a 20 year Life-of-Mine Discounted Free Cash Flow
valuation model using a long term Tanzanite price of US$ 16.00 per carat. We
believe that this is a comparatively cautious price assumption given that the
price peaked before the global economic crisis at US$ 28.00 per carat in
2006. The price is expected to continue its recovery from TanzaniteOne’s
2010 financial year average of US$ 7.00 per carat following the recovery in
the price of polished diamonds.
We derive an NPV of US$ 92.0 million at a 10% discount rate which translates
to a share price target of GBP 0.50 and initiate coverage with a BUY
recommendation.
Table 3: Life of Mine - Processed Tonnes '000 – NPV GBP per Share at 10% Real
Life-of-Mine – Years 12 14 16 18 20
Processed Tonnes ‘000 367.8 416.8 455.8 501.8 514.3
NPV GBP 0.42 0.45 0.47 0.49 0.50
Source: XCAP Securities PLC
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 4
Tanzanite
The gemstone industry and its market have long accepted that there are four
stones which deserve the label ‘precious’: diamond, sapphire, emerald and
ruby. The list of those classed as ‘semi-precious’ is extensive and whose
classification is by no means a perfect, as there are many rare gems which
command high prices, in which a regular market cannot be developed.
Tanzanite, a blue-violet vanadium-bearing gemstone, is the exception. First
discovered in 1967 and named by jewellers Tiffany & Co. after its country of
origin Tanzania, where the only known deposit was discovered at Merelani,
in the foothills of Mount Kilimanjaro (5,895 metres).
Tanzanite is the crystal form of a complex mineral Zoisite
(Ca2Al3(SiO4)(Si2O7)O(OH)), and can be best described as a vanadium rich
hydrous calcium aluminium silicate.
Table 4: Crystallographic Properties
Heading Left Tanzanite Tsavorite Emerald Ruby Sapphire Diamond
Colour Blue-Purple Brilliant Green Green Red Blue Clear
Mineral Zoisite Grossular Garnet Beryl Corundum Corundum Carbon
Mohs Hardness Scale 6.5 7.0 - 7.5 7.5 - 8.0 9.0 9.0 10
Specific Gravity 3.10 – 3.38 3.60 - 3.68 2.76 4.0 3.95 – 4.03 3.52 +/- 0.01
Chemical Formula (Ca2Al3(SiO4)(Si2
O7)O(OH)) Ca3Al2Si3O12 (Be3Al2(SiO3)6) Al2O3:Cr Al2O3 C
Discovered 1967 1967 1868
Credit Campbell R. Bridges
Mine Merelani Lemshuko Kagem Mogok Valley Kimberley
Country Tanzania Tanzanite Zambia Myanmar South Africa
Source: XCAP Securities PLC, Wikipedia
Unusually, Tanzanite is trichroic, radiating colours blue, violet and burgundy,
from three individual crystallographic axes. A small proportion of surfaces are
naturally coloured but the bulk has to be heated to bring out its marketable
blue hue, a process which is permanent. The result is a couple valence
exchange reaction stated by Olivier (2006), as taking the form: -
Ti3+ + V4+ -> Ti4+ + V3+
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 5
Tanzanite Market
The market for gems is intrinsically tied to the fortunes of consumers and
their level of confidence. Sales within the luxury goods market are closely
correlated with GDP.
Recent strong demand, particularly at diamond sales sold at tender, has seen
a remarkable recovery in the price of rough diamonds which have increased
from their credit-crisis lows, to exceed the pre-recession peak levels of mid-
2008.
The driving force for this recovery owes itself in part to:
• The liquidation of De Beers’ stockpile in and around 2007;
• Severe production cuts at diamond mines during the global credit crisis;
• The world’s largest diamond mines are now past their peak;
• The re-stocking by retail markets within the Far East; and
• Renewed consumer confidence in the US.
The United States was formerly the largest consumer market for polished
stones absorbing almost 50% of global supply, and is now eclipsed by India
and China, with their aspirational consumers.
Figure 1: Diamond Prices to August 2010
Source: WWW International Diamond Consultants Ltd
The recovery in rough diamond prices during 2009 to 2010 has been marked.
We expect polished prices to follow this lead with the global economic
recovery. The price of Tanzanite, which is late cycle, is expected to follow the
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 6
recovery in the price of polished diamonds. We expect this recovery to be
durable and pronounced over the next three years. Typically polished
diamonds lead the price of Tanzanite by between 12 to 18 months and
shortages of supply, in particular of smaller stones, is to the benefit of the
price for Tanzanite.
Improving marketability in the verification process from mine-to-market
further adds to TanzaniteOne’s brand, as the most ethical of Tanzanite
producers within the Merelani licence blocks. The TanzaniteOne gem
material is fully traceable to market from its source at the Merelani Mine in
Tanzania.
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 7
Tanzanite Foundation
The Tanzanite Foundation was established in an attempt to channel and
market all sources of Tanzanite through a single conduit.
TanzaniteOne, through the promotion of the Tanzanite Foundation, is the
world’s sole producer of ethically mined Tanzanite. The gems, which can be
traced from mine to market, are marketed through TanzaniteOne’s Tanzanite
Foundation.
The Tanzanite Foundation acts as a platform which encourages other mining
groups working within the Merelani District, including artisanal miners, to sell
their product through the Foundation. This maintains stability in a delicately
balanced market, safeguarding both price for the winner of the mineral and
giving reassurance of quality to the consumer. At the same time the
important ethical route guarantee restores confidence to the market via
traceability from mine to market via the company’s dedicated cutting and
polishing centre in Tanzania.
Table 5: Tanzanite Quality Scale
Grade Description
A Exceptional Colour, Eye Clean
B Rare Deep Colour, Eye Clean
B (SI) B Colour - Slightly Included
B (I) B Colour – Included
BL Lighter Colour B Grade, Eye Clean
BL (SI) B Light - Slightly Included
BL (I) B Light – Included
D Opaque Material
Source: TanzaniteOne Ltd
The Tanzanite Quality Scale™ (“TQS”) was introduced by TanzaniteOne as the
benchmark grading tool by which international gemmological laboratories
grade Tanzanite.
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 8
Mining Legislation
Mining in Tanzania falls under the legislation of The Mining Act, 2010 (“The
Act”). The Act, which came into assent in May 2010, and which re-enacts and
updates the preceding Mining Act of 1998, was promulgated with the
principle of maintaining a strong privately led mining sector.
At the same time the Tanzanian Government (“Government”) recognised and
made clear that it wished to address disparities identified specific to the
mining sector, including:
1) The low level of integration between the mining industry with other
sectors of the economy;
2) The modest contribution to GDP compared to the growth within the
mining sector; and
3) The capacity of the Tanzanian Government to effectively regulate
and administer the sector.
Through The Act, the Government aims to bestow and concentrate a greater
proportion of the benefits from mining on Tanzanian nationals.
Pertinent to TanzaniteOne, and applicants of the Government’s Special
Mining Licence, is the obligation to submit detailed proposals for the training
of Tanzanian citizens, and implement succession plans.
TanzaniteOne has endorsed this statute, in both the spirit and the letter of
the law, through the commissioning of a dedicated cutting and polishing
works. By realising as much of the mine-to-market benefit from Tanzanite
production within Tanzania, TanzaniteOne now makes a major contribution
to the development of the Tanzanian lapidary industry.
The company goes further to honour its responsibility to realise beneficiation
within Tanzania through the Tanzanite Foundation.
In this manner the Government utilises the legislation to create employment
opportunities, and to further rebalance Tanzania’s disproportionately weak
manufacturing base relative to the growing extractive industry.
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 9
Under The Act, mineral rights may be granted to mining companies under
which they may explore for and extract minerals in accordance with the
following licences:
Table 6: The Mining Act, 2010, Mineral Rights & Mining Licences
Licence Validity Renewal Capital Obligations Conditions
Years Extension Investment
Years US$ m
Prospecting Licence 4 3, then 2 n/a Feasibility Study
50% of area
relinquished upon
each licence
renewal
Gemstone Prospecting Licence 4 n/a n/a n/a
Retention Licence 5 n/a
Independent
Assessment by
Consultant
n/a
Primary Mining Licence 7 0.1 n/a n/a
Special Mining Licence Life-of-Mine Yes 100
Resource
Statement,
Feasibility Study
Environmental
Management Plan
Source: Government of Tanzania, The Mining Act, 2010
The most significant changes to the legislation are the drive to increase the
end benefit to Tanzania with regards to creating employment and developing
a manufacturing base within the country.
Important to TanzaniteOne are the changes in the royalty rate for both gems
and gemstones. The legislation has provided relief with a 67% reduction in
the royalty for the export of cut and polished gems to 1.0% from 3.0%. At the
same time, the Act imposes a 67% increase in the royalty rate to 5% for uncut
gemstones from the previous rate of 3%.
An additional section within The Act requires holders of a Special Mining
Licence to make available a listing on the Stock Exchange in Dar es Salaam,
such that shares may be bought and sold to Tanzanian nationals.
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 10
Additionally changes to mining royalties have resulted in both a 67% and 33%
increase in the royalty paid by uranium and gold miners respectively. The Act
also rewards gem miners by encouraging greater beneficiation within the
country with a 67% reduction in the royalty paid at the expense of exporters
of rough gemstones.
Table 7: Royalty Changes and Their Effect within The Mining Act, 2010
Mineral Royalty Royalty Royalty
2010 1998 Increase
Uranium 5% 3% 67%
Gemstones 5% 3% 67%
Diamonds 5% 5% 0%
Precious Metals 4% 3% 33%
Platinum Group 4% 3% 33%
Base Metals 4% 3% 33%
Gem 1% 3% -67%
Industrial
Minerals 3% 3% 0%
Source: Government of Tanzania, XCAP Securities PLC
With the commissioning of the cutting and polishing works, TanzaniteOne
fulfils its obligation with respect to The Act and we are confident that the
Special Mining Licence will be extended for a further 25 years.
We believe that as Tanzania grows in stature as a mining destination, it is
only through taking greater control over its mineral wealth that the
Tanzanian Government can avoid the unfortunate social and political unrest
now seen in such countries as South Africa and Zimbabwe.
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 11
Merelani Mine
The Merelani Mine is situated within one of 5 licence blocks within the
world’s only known source of Tanzanite over an approximate 7km by 1km
footprint near the foothills of Mount Kilimanjaro in Tanzania.
The mine which is serviced by six shafts is powered by a 2 MW line
connection to the National Grid. This power source which is maintained by
the Tanzanian Electricity Supply Company is backed up with diesel powered
generators for purposes of contingency.
With a design capacity to deliver over 1.2 megawatts to maintain continuous
mining operations, this capacity is significantly more than that required by
TanzaniteOne's entire mining and processing operations.
Tonnage from the mine is currently called from the Main Shaft where a 3.5
tonne skip draws production from infrastructure where development has
extended to 800 metres below surface.
Holed through and connecting the Main Shaft are both the Bravo and CT
Shafts, where underground development has increased the reserve base to
three years ahead of production.
Figure 2: Tanzanite Ore Zone – Fold Model
Source: TanzaniteOne Ltd
The Merelani Tanzanite orebody consists of tight isoclinally folded stacks,
containing calcsilicate boudins, which have been further cross folded and
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 12
plunge at 45 degrees to the NW, with mineralisation of Tanzanite having
been precipitated as the result of retrograde metamorphism during fluid
migration.
Figure 3: Tanzanite Ore Zone – Fold Model
Source: TanzaniteOne Ltd
TanzaniteOne have introduced a system of optical sorters within their plant
to enable improvements in their on-mine security resulting in higher margins
from Premium A and B Grades, and on branded polished Tanzanite.
At the time of the AIM Market listing in 2004, the Merelani Mine had a
resource calculated in accordance with the SAMREC guidelines, at between
0.95 million tonnes for 63 million carats to 1.26 million tonnes for 83 million
carats within the Indicated category.
Table 8: SAMREC 2004 Resource Estimate
Category Tonnage Carats
Indicated 0.95 63.0
1.26 83.0
Source: Ddraig Mineral Developments Limited
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 13
Tsavorite
In March 2009, TanzaniteOne acquired the Lemshuku–Shamberai Tsavorite
Project (“Tsavorite Project”), located approximately 20km southwest of
TanzaniteOne’s existing Tanzanite operations.
The acquisition of the Tsavorite Project from both from Green Hill Mining Ltd
and Kirkwood Resources Ltd was made for an aggregate consideration of
7,450,000 TanzaniteOne shares and US$ 350,000 in cash. It comprises 12
prospecting licenses over a 100 square kilometre area.
Tsavorite, an intense green variety of grossular garnet, also known as
Tsavolite, was first discovered at Lemshuko in 1967 by a South African gem
prospector and geologist, the late Campbell R. Bridges. Tsavorite, a calcium-
aluminium garnet with the formula Ca3Al2Si3O12, owes its intense colour to
trace amounts of both vanadium and chromium and unlike emeralds is highly
transparent.
Bridges, believing that the deposit was part of a larger geological structure
possibly extended into Kenya, was rewarded with a subsequent exploration
discovery in 1971 and was granted a mining permit to work his deposit.
In 1974 Tiffany & Co launched a marketing campaign which brought broader
recognition of the stone giving it its current name after Tsavo National Park in
Kenya.
TanzaniteOne through their subsidiary TsavoriteOne Mining, are developing
the Lemshuku–Shamberai Tsavorite project through resource estimation
having placed the project on hold during the global financial crisis of 2008.
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 14
Tsavorite Resource Estimate
Exploration work conducted during late 2009 and 2010 culminated in January
2011 with the release of a maiden JORC Compliant Resource Statement over
approximately 50% of the Tsavorite Project.
This resource study evaluated results from a total of 164 drill holes to an
average depth of 19 metres for a total depth of 3,180 metres. The drilling,
which comprised 6 inch rotary air blast (“RAB”) and down hole hammer
drilling, was used to determine both the volume of gravels, with 2,100 heavy
bulk mineral sampling to determine the in-situ grade at a 1.5 metre intervals.
Between an estimated 7.6 to 10.4 million bank cubic metres (“bcm”) or
approximately 18.2 to 24.9 million tonnes was delineated within the Inferred
Resource Category. In conjunction with this is an associated Indicated
Resource of between 0.89 to 2.17 million bcm, or approximately 2.1 to 5.2
million tonnes enclosed within the Inferred resource.
An average in-situ grade of 1.6 carats per loose cubic metre (“lcm”) was
defined for the Indicated Resource, with an estimated 1.4 and 3.5 million
carats of Tsavorite. The additional resource statement is expected in the
second quarter of 2011.
Table 9: Tsavorite Project - JORC Compliant Resource Summary
Resource Resource Gravel Type Waste Resource Average Grade Carats
Category Block bcm million carats per lcm millions
Indicated Lines C to F Terrace 50% 0.34 1.6 0.55
Gravels 80% 0.14 0.22
Indicated Lines C to F Channel 50% 1.83 1.6 2.93
Gravels 80% 0.75 1.2
Inferred Lines C to J Channel and
Terrace 7.6 to 10.4
Total Inferred Resource 7.6 to 10.4
Source: TanzaniteOne Ltd
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 15
Valuation
We present our valuation analysis for TanzaniteOne’s Merelani Mine based
upon an intuitive 20 year Life-of-Mine Discounted Free Cash Flow model.
We use a 20 year Life-of-Mine forecast based upon the strength of the
historical production profile, gaining comfort from the following mining and
geological factors:
1) The Merelani Mine now has a significant level of mining flexibility,
attributable to sub-surface development since the publication of the
maiden SAMREC Compliant Resource Estimate of 2004;
2) Underground sampling, undertaken along the hinge axes of the
plunges, has contributed to a greater understanding of the geological
model and the mineralisation within the Jaluawatu Zone;
3) There exists a greater overall understanding of the structural controls
on mineralisation with respect to the boudinage; and
4) A change in the mining system has enabled better mine planning -
the current reserve to production base exceeds 3 years, easing grade
prediction, and thus improving the Mine Call Factor over the Life-of-
Mine.
Notwithstanding these determinants, our appraisal takes account of the
unique nature of the Merelani Mine ore body. Specifically, the deceptively
difficult task of calculating a continuous, compliant resource estimate on an
annual basis for a mineral which can neither by assayed, nor accurately
calculated with ease and whose capacity is measured solely by direct
recovery from mining operations.
Our analysis looks specifically at this conundrum by focusing methodically on
a range of scenarios. We consider the cyclical nature of the market for
Tanzanite, which is invariably tied to consumer confidence and discretionary
spending, and the marketing of an end product, which has no industrial use
and no formal market, as well as the accepted variables which affect the
valuation of mining companies including:
1) Life-of-Mine Tonnage – modelled over 12, 14, 16, 18 and 20 Years;
2) Tanzanite Grade – carats per tonne;
3) Product Split - % of High Quality A, B Grade relative to ROM Quality;
4) Tanzanite Price Received – High Quality A, B Grade Product;
5) Tanzanite Price Received – Run-of-Mine Product; and
6) Mining Unit Costs – US$/tonne.
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 16
Life-of-Mine Tonnage
We present our Life-of-Mine processed tonnage scenarios over a range of
years from between 12, 14, 16, 18 and 20 years, detailing the corresponding
processed Life-of-Mine NPV Valuation per share at a 10% discount rate and
price per share.
Table 10: Life-of-Mine Tonnage
Life-of- Production Life-of- Production Production NPV GBP
Mine Years 1–10 Mine Years 1-10 Peak 2015 10% Real
Years Tonnage Tonnage % Tonnage US$ M per Share
12 344,750 367,750 94% 40,000 78 0.42
14 353,750 416,750 85% 40,000 84 0.45
16 353,750 455,750 78% 40,000 88 0.47
18 353,750 501,750 71% 40,000 91 0.49
20 353,750 514,250 69% 40,000 92 0.50
Source: XCAP Securities PLC
Our forecast envisages an increase in the tonnage processed to a peak rate of
40,000 tonnes per annum (“tpa”) in 2015, from our 2010 estimated
throughput of 37,000 tpa. We maintain Tanzanite production at a plateau
Figure 4: TanzaniteOne, Life-of-Mine - Tonnage Production Profile
Source: XCAP Securities PLC
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
12 Years 14 Years 16 Years 18 Years 20 Years
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 17
rate of slightly over 2.0 million carats per annum (“cpa”) for a five year
period, and importantly for investors, front load the tonnage within the first
ten years then model a decline in production over the respective Life-of-Mine
scenarios as detailed in the graphic.
Table 1: Life of Mine - Processed Tonnes '000
Real NPV US$ million Real NPV GBP per Share
Discount 367.8 416.8 455.8 501.8 514.3 Discount 367.8 416.8 455.8 501.8 514.3
0.0% 149 173 190 208 211 0.0% 0.80 0.93 1.02 1.13 1.14
2.0% 129 148 160 174 175 2.0% 0.70 0.80 0.87 0.94 0.95
4.0% 113 127 136 146 147 4.0% 0.61 0.69 0.74 0.79 0.80
6.0% 100 110 117 124 125 6.0% 0.54 0.60 0.63 0.67 0.68
8.0% 88 96 101 106 107 8.0% 0.48 0.52 0.54 0.57 0.58
10.0% 78 84 88 91 92 10.0% 0.42 0.45 0.47 0.49 0.50
Source: XCAP Securities PLC
At a lower case scenario, using a 12 year Life-of-Mine, we calculate an NPV of
US$ 78.0 million. This figure escalates to an NPV of US$ 92.0 million for a
corresponding 20 year Life-of-Mine at a 10% discount rate for a total
processed tonnage of 514,250 tonnes, which translates to a GBP 0.50 per
share.
Tanzanite Grade
Our analysis extends further to determine the sensitivity of the NPV to the
grade presented to the plant. We select an average Tanzanite grade of 55
carats per tonne, which we consider represents a fair blend from production
over the Life-of-Mine. We run a sensitivity analysis at intervals of +/- 5 and 10
carats per tonne either side of this variable.
Table 2: Tanzanite Grade – carats per tonne
Real NPV US$ million Real NPV GBP per Share
Discount 45 50 55 60 65 Discount 45 50 55 60 65
0.0% 159 185 211 236 262 0.0% 0.86 1.00 1.14 1.28 1.42
2.0% 132 154 175 197 219 2.0% 0.71 0.83 0.95 1.06 1.18
4.0% 111 129 147 166 184 4.0% 0.60 0.70 0.80 0.90 0.99
6.0% 93 109 125 141 156 6.0% 0.50 0.59 0.68 0.76 0.85
8.0% 79 93 107 120 134 8.0% 0.43 0.50 0.58 0.65 0.72
10.0% 68 80 92 104 116 10.0% 0.37 0.43 0.50 0.56 0.63
Source: XCAP Securities PLC
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 18
At our base case scenario of 55 carats per tonne and a 20 year Life-of-Mine,
our modelled grade gives an NPV of US$ 92 million or GBP 0.50 per share.
This production metric advances to an NPV of US$ 104 million and US$ 116
million at grade increases of 60 and 65 carats per tonne respectively. These
NPVs equate to GBP 0.56 and GBP 0.63 per share, thus illustrating the benefit
to the NPV of potential productivity improvements.
Figure 5: Improvement In Mine Call Factor Improves Grade
Source: TanzaniteOne Ltd, XCAP Securities PLC
We consider this to be a likely scenario and would justify a higher valuation
than our core GBP 0.50 target, as highlighted by the NPV table. More recently
TanzaniteOne has encountered a potential high-grade zone within the
intersecting fold structure, where a 12,100 carat rough Tanzanite, (2.42 kg)
was recovered.
This was the third largest Tanzanite gemstone to have been mined from the
Merelani Mine, and will undoubtedly contain significant quantities of the
highly desirable, high-end Grade A quality Tanzanite.
40
50
60
70
80
90
0
5
10
15
20
25
Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 F Jun 12 F
cara
ts p
er
ton
ne
Pro
cess
ed
To
nn
es
-'0
00
Interim Reporting Period - Processed Tonnes '000s
Plant Feed Tanzanite Grade
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 19
Product Split - % of High Quality A, B Grade Product
We investigate the effect of the percentage contribution of the High Quality
A and B Grade Tanzanite products relative to the Run-of-Mine production to
the NPV and note the lower degree of sensitivity.
Table 11: Product Split - % of High Quality A, B Grade Product relative to Run-of-Mine Product Quality
Real NPV US$ million Real NPV GBP per Share
Discount 0% 5% 10% 15% 20% Discount 0% 5% 10% 15% 20%
0.0% 211 217 224 231 238 0.0% 1.14 1.17 1.21 1.25 1.28
2.0% 175 181 187 194 200 2.0% 0.95 0.98 1.01 1.05 1.08
4.0% 147 153 158 164 169 4.0% 0.80 0.83 0.86 0.88 0.91
6.0% 125 130 135 140 145 6.0% 0.68 0.70 0.73 0.76 0.78
8.0% 107 111 116 120 125 8.0% 0.58 0.60 0.63 0.65 0.67
10.0% 92 96 100 104 108 10.0% 0.50 0.52 0.54 0.56 0.59
Source: XCAP Securities PLC
We believe that with the introduction of optical sorting systems,
TanzaniteOne can realise improvements in product quality resulting in higher
margins from Premium A and B Grades, and on branded polished Tanzanite.
Our core GBP 0.50 target price assumes nothing for these A and B high end
products. Therefore the upside to this metric remains open.
Tanzanite Price Received – High Quality
Extending this we look at the impact of a 20% inclusion of the A and B
product relative to the Run-of-Mine production, at varying prices from US$
20 per carat up to US$ 40 per carat, and their respective contribution to the
NPV.
Table 4: Tanzanite Price Received – 20% High Quality – US$/carat
Real NPV US$ million Real NPV GBP per Share
Discount 20 25 30 35 40 Discount 20 25 30 35 40
0.0% 238 259 279 300 321 0.0% 1.28 1.40 1.51 1.62 1.74
2.0% 200 217 235 253 271 2.0% 1.08 1.18 1.27 1.37 1.47
4.0% 169 185 200 216 232 4.0% 0.91 1.00 1.08 1.17 1.25
6.0% 145 158 172 186 199 6.0% 0.78 0.86 0.93 1.00 1.08
8.0% 125 137 149 161 173 8.0% 0.67 0.74 0.81 0.87 0.94
10.0% 108 119 130 141 152 10.0% 0.59 0.64 0.70 0.76 0.82
Source: XCAP Securities PLC
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 20
At the base case scenario, a 20% inclusion of A and B Grade product at a
Tanzanite price of US$ 20 per carat, we calculate an NPV of US$ 108 million,
which escalates by 41% to US$ 152 million, or between GBP 0.59 and GBP
0.82 per share, demonstrating the improvement to the NPV of an upturn in
the retail prices.
Miner Gemfields PLC (AIM:GEM) interim results for period to December 2010
report a 414% increase in average price per carat sales to US$ 26.20 per carat
at their December auction, from US$ 5.10 per carat received at the
November 2009 site, both of which were held in Johannesburg, South Africa.
More importantly the percentage of Gemfields lots sold by value rose to 99%
from 76% all for Higher Quality carats.
Tanzanite Price Received – Run-of-Mine Quality
Next we test the gearing of the run-of-mine product to the price of
Tanzanite. We increase our base case Tanzanite price of US$ 7.00 per carat
through the economic cycle to reflect the recovery in the luxury goods
market, through US$ 8.00 per carat in 2011, and a long term average life-of-
mine flat forecast price received of US$ 16.00 per carat.
Figure 6: Historic & Forecast Tanzanite Price
Source: TanzaniteOne Ltd, XCAP Securities PLC
0.00
5.00
10.00
15.00
20.00
25.00
30.00
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Tanzanite price US$ per carat
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 21
This rate of change in this estimate is again tested +/- 5% and 10% either side
of this forecast.
For a 10% increase in our long-term Tanzanite price received of US$ 16.00
per carat to US$ 17.60 our NPV experiences a 14% uplift in the share price to
GBP 0.57 from GBP 0.50.
Table 5: Tanzanite Price Received - Low
Real NPV US$ million Real NPV GBP per Share
Discount 14.40 15.20 16.00 16.80 17.60 Discount 14.40 15.20 16.00 16.80 17.60
0.0% 182 196 211 225 239 0.0% 0.98 1.06 1.14 1.21 1.29
2.0% 152 164 175 187 199 2.0% 0.82 0.88 0.95 1.01 1.08
4.0% 127 137 147 158 168 4.0% 0.69 0.74 0.80 0.85 0.91
6.0% 107 116 125 134 142 6.0% 0.58 0.63 0.68 0.72 0.77
8.0% 91 99 107 114 122 8.0% 0.49 0.54 0.58 0.62 0.66
10.0% 78 85 92 99 105 10.0% 0.42 0.46 0.50 0.53 0.57
Source: XCAP Securities PLC
Mining Unit Costs
Finally we consider the unit cost of mining on a US$ per tonne metric basis as
being independent of the Tanzanite grade and a measure of efficiency of
mining rather than the benchmark US$ per carat.
We show that for a 25% reduction in operating costs to US$ 150 per tonne
the share price increases by 9% to GBP 0.51 from GBP 0.47, giving insight to
the rationalisation experienced over the past year with regards to both head
office and on-mine costs.
Table 12: On Mine Unit Costs – US$/tonne
Real NPV US$ million Real NPV GBP per Share
Discount 150 175 200 225 250 Discount 150 175 200 225 250
0.0% 214 206 197 186 174 0.0% 1.15 1.11 1.06 1.01 0.94
2.0% 178 172 164 155 144 2.0% 0.96 0.93 0.89 0.84 0.78
4.0% 150 145 138 130 120 4.0% 0.81 0.78 0.75 0.70 0.65
6.0% 128 123 117 110 101 6.0% 0.69 0.67 0.63 0.59 0.55
8.0% 110 106 100 94 86 8.0% 0.59 0.57 0.54 0.51 0.46
10.0% 95 91 87 81 73 10.0% 0.51 0.49 0.47 0.44 0.40
Source: XCAP Securities PLC
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 22
Recommendation
The price of Tanzanite has seen a recovery from its credit-crisis lows of 2008.
On a relative basis the gem lags diamond prices by approximately a year to
eighteen months and has started to show new life along with recovery in
consumer confidence from the nadir of the past three years.
TanzaniteOne’s current market capitalisation of US$ 18.4 million (GBP 11.4
million) sits at 39% discount to the current book value of its fixed assets of
US$ 30.1 million.
With the historical share overhang removed, no debt and a reserve-to-
production base of 3 years, we believe that the stock is grossly undervalued.
TanzaniteOne’s main peer Gemfields (AIM:GEM) is currently being re-rated,
having also returned to profit following recovery from the global economic
crisis. We expect TanzaniteOne to follow a similar market re-rating.
We value TanzaniteOne on a 20 year Life-of-Mine Discounted Free Cash Flow
valuation model. Using a long-term Tanzanite price of US$ 16 per carat we
derive a NPV of US$ 92.0 million, which translates to a share price target of
GBP 0.50, and initiate coverage with a BUY recommendation.
Table 13: Shareholding
%
Directors 17.0
BlackRock Investment Management 4.1
Source: TanzaniteOne Ltd
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 23
Glossary
Boudinage A structural geological feature formed under
flexural tension, where a competent tabular
body is extended and deformed amidst less
competent surroundings.
Bank Cubic Metres Bank Cubic Metres (“BCM”) is a traditional unit
of volume in mining. A bank cubic metre
represents the contents of a cubic metre of rock
in place, before it is drilled and blasted.
Feasibility Study A study, including final engineering, to
determine the economic viability of a project.
Free Carried Interest The interest derived from holding shares of
which the holder enjoys all the rights of a
shareholder but has no obligation to subscribe
or contribute equity capital for the shares.
Gem Cut and polished or engraved gemstone.
Gemstones Rough or uncut stone, including diamonds and
emeralds and tanzanite along with others
prescribed within The Mining Act, 2010.
JORC The Australasian Institute of Mining and
Metallurgy’s Joint Ore Reserves Committee
mineral resource classification system.
Jaluawatu Zone The Jaluawatu Zone is the main tanzanite-
bearing ore-zone named after Ali Jaluawatu, a
Tanzanian farmer who started large scale
mining within Block C.
Loose Cubic Metres The gross quantity from mining, the aggregate
of Bank Cubic Metres plus and allowance for
bulking.
Mining Development
Agreement
An agreement made between the Government
and the holder of a mineral right with intention
to conduct mining operations under a Special
Mining Licence.
Mining Licence A mining licence for a medium scale mining
operation, whose capital investment is between
US$ 100,000 and US$ 100,000,000 or its
equivalent in Tanzanian shillings.
On-Mine Cash Costs On-mine cash costs include mine operating
costs, mine administration costs and royalty
charges incurred at Merelani Mine.
Primary Mining Licence A licence for small scale mining operations,
whose capital investment is less than
US$100,000 or its equivalent in Tanzanian
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 24
shillings.
Qualified Person The competent person, who in addition to
signing off a resource statement, also consents
to being named as the qualified person within
the resource statement.
Reserve-to-Production A ratio reflecting the rate of underground
development to depleting reserve base. A
multiple of less than 1.0 x suggests a critical fall
in the rate of development may highlight
problems with sub-surface congestion and face
availability.
Rotary Air Blast Rotary Air Blast (“RAB”) is an inexpensive
exploration technique frequently used to obtain
rock chip or gravel samples at shallow depth.
Compressed air is directed down the inside of a
percussive drill, with the released sample
returning via the outside pipe casing.
SAMREC The South African Code for Reporting of
Exploration Results, Mineral Resources and
Mineral Reserves, prepared by the South
African Mineral Resource Committee under the
auspices of the South African Institute of Mining
and Metallurgy and the Geological Society of
South Africa.
Special Mining Licence A licence awarded under the Tanzanian Mining
Act 2010 for large scale mining operation,
whose capital investment is not less than
US$100,000,000 or its equivalent in Tanzanian
shillings.
Tanzanite Zoisite Ca2Al3(SiO4)(Si2O7)O(OH)
Tanzanite Foundation A non-profit industry supported organisation
which strives to deliver value for stakeholders,
whilst upholding the ethical route to market.
Trichroism A property, peculiar to certain crystals, of
transmitting light of three different colours
when viewed from three different directions.
Tsavorite Grossular Garnet Ca3Al2Si3O12
Unit Costs A measure of mining efficiency independent of
the concentration of mineral within the
material moved.
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 25
Abbreviations
bcm Bank cubic metres
ct Carat
CPR Competent Person’s Report
cpt Carat per tonne
DMD Ddraig Mineral Developments Limited
DMS Dense Media Separation
EIA Environmental Impact Assessment
GDP Gross Domestic Product
JORC Joint Ore Reserves Committee
JWZ Jaluawatu Zone
lcm Loose cubic metres
L-of-M Life-of-Mine
MML Merelani Mining Limited
MT Million tonnes
TPA Tonnes per annum
MCPA Million carats per annum
RAB Rotary Air Blast
SAMREC The South African Mineral Resource Committee
SML Special Mining Licence
The Act The Mining Act, 2010
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 26
Weights and Measurements
1 Carat = 200 milli grams
1 tonne = 1 metric tonne = 1000 kg = 2204.6 pounds
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 27
References
Merelani Mine, Competent Person’s Report, 2004
Ddraig Mineral Developments Limited, Llandudno, Conway, Wales
In: Tanzanite One Limited, AIM Rule 26, Admission Document, 2004
Olivier, B., 2006, The Geology and Petrology of the Merelani Tanzanite
Deposit, NE Tanzania, Unpublished Ph.D. Thesis 2006
Universiteit van Stellenbosch, Stellenbosch, Suid Afrika
The United Republic of Tanzania, 2010, The Mining Act, 2010
Government of the United Republic of Tanzania, Dodoma, Tanzania
Storrar, C.D., 1987, South African Mine Valuation, Revised 3rd Edition
Chamber of Mines of South Africa, Johannesburg, South Africa
Broker Yes
Market Maker Yes
Note seen by company Yes
Factual changes No
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 28
Disclosures
This research is non-independent and is classified as a Marketing Communication
under FSA rules. As such it has not been prepared in accordance with legal
requirements designed to promote independence of investment research and it is
not subject to the prohibition on dealing ahead of the dissemination of investment
research.
Meanings of XCAP Recommendations Analyst
Buy
Expected to outperform the FTSE All Share by
15% or more over the next 12 months.
The research analyst attests that the views expressed in this
research report accurately reflect his personal views about the
subject security and issuer. Furthermore, no part of his
compensation was, related to the specific recommendation or
views expressed in this research report.
Outperform
Expected to outperform the FTSE All Share by
5/15% over the next 12 months.
Market Perform
Expected to perform in line with the FTSE All
Share over the next 12 months.
Underperform
Expected to underperform the FTSE All Share
by 5/15% or more over the next 12 months.
Sell
Expected to underperform the FTSE All Share
by 15% or more over the next 12 months
Speculative Buy
The stock has considerable level of upside but
there is a higher than average degree of risk.
XCAP Securities plc acts as broker to this company. XCAP Securities plc may have
acted as manager in the underwriting or placement of securities and/or may have
received compensation for investment banking for this company within the last 12
months.
XCAP Securities plc is a Market Maker to this company.
As a new company XCAP Securities plc will produce a table of its Research
Recommendations for the relevant quarter when it has established a material
record.
16 March 2011 TanzaniteOne (AIM:TNZ)
XCAP Securities UK Equity Research 29
Disclaimer
This Research is intended only for investors who are Professional Clients or Eligible
Counterparties as defined by FSA, and is therefore not to be distributed to other
classes of investors.
Whilst this Research is not subject to the prohibition on dealing ahead of the
dissemination of investment research, XCAP Securities plc (XCAP) has adopted
internal procedures which prohibit analysts and other relevant persons from dealing
ahead of non-independent research, except for legitimate market making and
fulfilling clients’ unsolicited orders as part of its Conflicts of Interest Policy. XCAP
Conflicts of Interest Policy is available at www.xcapgroup.com
This document is provided solely for your information and does not constitute an
offer or solicitation to buy or sell securities or instruments of any kind. This
document is produced in accordance with UK laws and regulations and is not
intended for any person whose nationality or residential circumstances may render
its receipt unlawful.
The information contained in this document has been obtained from sources which
XCAP believes to be reliable. The Company does not warrant that such information is
accurate or complete. All estimates and prospective figures quoted in this report are
forecasts and not guaranteed. Opinions included in this report reflect the Company’s
judgement at the date of publication and are subject to change without notice.