Vaaldiam Looks To ‘Stop The Bleeding’

Vaaldiam Resources (VAA-T, VAAFF-o) says the world financial crisis and a 25% drop in rough diamond prices since September have forced it to shut down its Duas Barras alluvial diamond mine in Minas Gerais, Brazil, back out of a major acquisition, and cancel all exploration work for its projects in Brazil and Canada.

In September, Vaaldiam said it wasn’t able to complete a $20-million debt financing at 15 per share for development at Duas Barras and a feasibility study on its Brauna kimberlite project, in Bahia state.

President and CEO Ken Johnson, who has taken a 25% pay cut, says the company is now just trying to control costs.

“The first step is to stop the bleeding, stop our expenditures and then come January, look to restart again,” Johnson says.

The company had planned to buy the Pecanha mine and concessions, located next to Duas Barras, but pulling out of the deal will save it $8.5 million.

Vaaldiam is also indefinitely postponing a plan to spin out its Canadian assets into a separate company and is laying off three-quarters of its 14 staff at the Toronto office.

Wellington West Capital Markets mining analyst Catherine Gignac says the fall in rough diamond prices has nothing to do with Vaaldiam’s current dismal state. She says the company’s management strategy has lacked focus.

“In the last year, the company has just been changing direction and changing strategy and because of that, we decided to discontinue coverage,” Gignac says.

Vaaldiam reported a $58.2-million net loss in its third-quarter results. Included was a $13-million write-down of exploration properties and a $72-million impairment charge related to the closing of its Chapada alluvial mine in Matto Grosso state.

The company said it was planning to finance and convert the Chapada operation, where commercial production began in March 2007, from a contract to a company-run mining operation. This would increase production and decrease costs. It still needs to install an in-pit screening plant in the mining area to reduce the cost of ore transport, but because the company can’t get financing for the project, that, too, has been deferred.

Gignac says Vaaldiam didn’t provide enough information to shareholders about its plans. For example, Chapada was shut down in July, but there was no mention of the closure until the third-quarter report was released. Gignac also thought it was odd that the company was considering divesting its Canadian assets, which it had just acquired through the takeover of Great Western Diamonds in March.

“It just seemed to be a strange corporate strategy,” Gignac says. “They didn’t spend time on their biggest assets, which was the kimberlite exploration. . . they just kind of focus on the small alluvial operations which were really only meant to bring in a bit of working capital to keep the lights on.”

Well, now the lights are nearly off. If funds become available, the company will go ahead with a planned bulk-sampling program at Brauna. Johnson says the company is awaiting the arrival of a dense media separation plant from South Africa.

“Once that arrives, we’ll start excavating the bulk sample, assuming we have the cash to do so,” Johnson says.

The company still has 4,300 carats of production from Duas Barras to sell in December to help bolster its cash position. Vaaldiam is also considering selling some of its assets to cut costs. The company will have more extraordinary charges in its fourth-quarter results related to severance pay, Johnson says.

The latest diamond sale from Duas Barras returned prices only 12% lower than the company’s historical average of US$165 per carat, but Vaaldiam feared that prices would continue to drop.

As for the unsuccessful financing, the company was only able to raise little more than $106,000 as its share price had fallen below the offering price. Since September, Vaaldiam shares have sunk to 1.5 each from a 52-week high of 62 last January. The company raised about $1 million in October through a private placement of mostly flow-through shares.

Johnson says its acquisitions were more expensive than anticipated, but he also said the equity markets have changed a lot over the last year.

“Investors were giving substantial value to companies that were trying to grow through acquisition,” Johnson says. “You used to get much more value for exploration plays.”

He says he’s positive about the future, anticipating Vaaldiam will be able to get Duas Barras up and running again next year and the development of Brauna will go ahead. But he wasn’t as sure about the outlook for Chapada.

“We’ll get Chapada up and running early next year or we’ll look at divesting ourselves of that mine.”