have a vivid memory of when Tanzanite One (TNZ) listed back in late 2004. This memory will probably never leave, my otherwise unreliable, brain because the source of the information wasn't a fellow investor or analyst - it was my father in law! Proof that if there is one thing that Tanzanite One hasn't required help with, it is getting its story in the press. Tanzanite is an extremely rare gemstone that is mined from only one source in the world ? a six-kilometre strike at the foot of Mt. Kilimanjaro in Tanzania.
Tanzanite gemstones, which only require low heat treatment to intensify their colours, are usually blue or violet, sometimes green, sometimes yellow and sometimes other colours. So rare are 'other colours' that they are impossible to value and so far Tanzanite One has been locking them away in a safe until they decide what to do with them!
TNZ control approximately 2km of the 6km total strike and are by far the largest producer of Tanzanite gemstone, with about 32% of the rough stones market globally. The other 4 km of the strike is fragmented into 400 small claims, with most of them producing less than 1% of the remaining production each. Having a commanding portion of the rough production meant that TNZ could effect the prevailing supply equation for rough Tanzanite. So the company decided to up their game by moving into cutting, polishing gemstones and wholesaling jewellery, a feat only ever successfully accomplished by DeBeers. Unfortunately, TNZ had to decide to close down their jewellery division and made a provision of $2.8 million against the write down of stocks! This was a serious blow to their business model, which was designed to allow the company to have both a commanding lead in rough Tanzanite production, and to benefit from the strong retail brand potential of Tanzanite, with increased margins. The failure of the jewellery business is another reminder that mining companies are better off sticking to mining than processing, marketing, and retailing finished products as well.
All is not lost however. Newly appointed CEO, Ian Harebottle, has come on board with one goal in mind ? to get the company focused on mining profitably. As in a diamond pipe, Tanzanite gemstones are not spread consistently throughout the strike zone - which means grades can vary considerably. Before Ian came on board, the company was trying to identify higher-grade pockets of ore for extraction. Because grades vary widely from zone to zone ? calculating a grade prior to extraction is not an exact science and this has been reflected in the most recent interim results, which showed a drop in the average price per carat from $13 per carat in 2005 to $9.63 per carat in the comparable 2006 period. (Although, both the 2005 and 2006 prices were within the price parameters in the mine plan.)
The new strategy, which is being developed, intends the more traditional approach of proving up decades of mine life and maintaining a steady, consistent head grade by blending both higher and lower grades. This strategy also aims to introduce more mechanised mining and increase throughput, reduce labour costs, and thus lower costs per tonne of ore processed. Recently, mine cash cost per carat in the interim results rose from $2 to $2.32, but this was due to a drought in Tanzania, which hit electricity supplies and forced the use of diesel fuel for power generation.
Despite the combination of lower grades, increased fuel costs and the write off of the wholesale division, Tanzanite One still intends to pay an interim dividend of 2 cents per share to shareholders on the register before 20th October. Going forward Tanzanite still has $6.6 million in the kitty and there is no need for any major capital investment in the mine. Evolution, brokers, have slashed their earnings before interest, tax and amortisation (EBITA) forecasts to $9.2 million for 2006, $17 million for 2007 and $23.6 million for 2008 - a gentle reminder that all is not lost.
Tanzanite One, as just a mining operation, may be a little less sexy than it was before, but as a mining operation it is still unique!