Tiomin to play white knight to Vaaldiam

Vaaldiam Resources (VAA-T, VAAFF-O) ended 2009 with two Brazilian diamond mines on care and maintenance and a balance sheet in tatters. As of Sept. 30 the junior had debt of $5.7 million and cash and equivalents of $399,665. Net losses from continuing operations for the first nine months of the year reached $10.23 million.

So when Tiomin Resources (TIO-T) came along and offered to acquire the company in an all-share transaction, Vaaldiam’s largest shareholders agreed to support the deal. The combination of the two juniors will create a diamond production, exploration and development company with a pro forma market capitalization of $20.7 million based on Tiomin’s closing share price of 3¢ on Jan. 15.

“I’m not surprised Vaaldiam had to find someone,” says an observer of the diamond industry. “It would have been very unlikely they could have raised money on their own because they have upset too many shareholders. Shareholders have been very upset with the demise of their share price — the stock went into the tank.”

Under the plan of arrangement, Tiomin will acquire all of Vaaldiam in an all-share transaction on the basis of 0.80 of a Tiomin share for one Vaaldiam share. If the transaction is approved by all shareholders, Vaaldiam will become a wholly owned subsidiary of Tiomin. Following the deal Vaaldiam’s shareholders will own roughly 30% of Tiomin.

“We got hit very hard by the crisis when diamond prices dropped dramatically,” Ken Johnson, Vaaldiam’s president and chief executive, explained in a telephone interview. “We need their money to clean up our balance sheet…We’re no different than any other diamond company – we’re not getting full value for our diamond assets.”

Johnson noted that his goal is to reposition the company as South America’s largest diamond producer marketing high-quality diamonds with a combined average sales value of over US$275 per carat in addition to measured and sustainable production growth.

“They needed cash, we have cash,” Robert Jackson, Tiomin’s president and chief executive told the Northern Miner, adding that Tiomin has more than $11 million in the bank in addition to other assets “that we can get liquid on.”

“They were wrong-footed by the crisis and weren’t the only company that got into trouble,” Jackson explained. “What’s different between the mining and the base metals industry is that while diamond prices have recovered to the level they were at before the crisis, the share prices of diamond producers have not, unlike the base metals companies have, so it was one of the niches available to us to get a good deal. It’s an opportunity for us to get into one of the sectors that has potential upside.”

Vaaldiam owns 100% of the Duas Barras diamond mine, 150 km north of the historic town of Daimantina in the state of Minas Gerais in Brazil. It also owns the Chapada diamond mine and processing plant in the Brazilian state of Mato Grosso, 80 km northeast of the state capital of Cuiaba.

“Duas Barras needs very little work and not a huge amount of investment before it’s ready to go,” Tiomin’s Jackson noted. “Chapada needs more capital evaluation but definitely has potential to go back into production. We would aim to do it sequentially – we’re not going to run before we can walk. We’ll start with Duas Barras, which we should be able to get back into production by the middle of the year if we get the deal approved by shareholders in March.”

Vaaldiam’s Johnson believes Chapada could return to production in the first quarter of 2011.

In addition to the two diamond mines in Brazil, Vaaldiam has a 20% interest in Brauna, an advanced exploration project in the state of Bahia, about 350 km from the city of Salvador, the state’s capital.

Vaaldiam has been developing its Brauna kimberlite project, which is in the bulk sampling and resource definition phase of development. The Brauna property also has gold occurrences.

In addition, Vaaldiam has a second diamond exploration project in Brazil called Catalao, as well as the Candle Lake diamond project in the Canadian province of Saskatchewan.

Tiomin expects production will reach 20,000 carats in 2010 and double to 40,000 carats the following year.

For its part, Vaaldiam shareholders will benefit from Tiomin’s cash as well as its Pukaka copper-gold asset in Peru. The South American nation hosts about 30% of the world’s copper resources and Tiomin’s 49% of Pukaka works out to more than 1 billion pounds of copper, Jackson said.

“For exploration purposes it’s open in all directions,” he explained. “It’s totally unrecognized in our share price and there’s gold there too. If someone made a decent offer for Peru we’d look at it but it’s got to be sensible and reflect that copper is at about US$3.50 per lb.”

Looking ahead, Jackson says, the emphasis will be on diamonds in Brazil and generating cash flow.

“Our focus is on getting the Brazil assets up and running, generating cash flow and explaining to our shareholders systematically over the next six months the benefits of the deal,” he said.

In addition to the plan of arrangement, Tiomin and Vaaldiam have also entered into a subscription agreement, pursuant to which Tiomin acquired 20 million shares of Vaaldiam, representing about 8% of Vaaldiam’s shares, at a price of 3¢ per share in a private placement for total gross proceeds to Vaaldiam of $600,000.

A special meeting of shareholders will be held to vote in March 2010.

Tiomin closed up 1.5¢ or 50% on the news at 4.5¢ per share with 16.2 million shares trading hands, while Vaaldiam inched up half a penny or 14.3% to close at 4¢ per share with 2.9 million shares trading hands.