Analysts’ Ideas of the Week – Diamcor Posts Record ...

Week of March 3, 2014

Analysts¡¯ Ideas of the Week ¨C Diamcor Posts Record Revenues and Sales



Sid Rajeev, B.Tech, MBA, CFA

Head of Research

Diamcor Posts Record Revenues and Sales

I wrote about Diamcor Mining Inc. (TSXV: DMI) in my weekly column here in June of last year, as one of our

top picks. DMI¡¯s shares were up 49% ($1.22 to $1.82 per share) by November 2013. The share price has since

dropped, and is currently trading at $1.39 per share; still up 14% since June of last year.

Here is a quick background - DMI is a brand new producer of rough diamonds from the Krone-Endora project in

South Africa. The project was acquired in 2011 from De Beers for just $2M. The project sits immediately

adjacent to De Beers' Venetia Diamond Mine, which is the third largest diamond mine in the world, and South

Africa's largest diamond producer. Tiffany & Co. (NYSE: TIF) is DMI¡¯s strategic partner. Tiffany has enabled

DMI to speed up the development of Krone Endora by providing capital when necessary.

DMI recently released their Q3 (quarter ended December 31, 2013) results. In the quarter, the company reported

$1.40 million in revenues; its best quarter since commencing operations at Krone-Endora. The company has so

far sold approximately 15,410 carats for gross proceeds of US$3.2 million @ at an average rate of US$206 per

carat. The following table shows all sales so far.

?

? 2013 Fundamental Research Corp. ¡° 10 Years of Bringing Undiscovered Investment Opportunities to the Forefront ¡°

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Page 2

Carats

Amount (US$,

M)

US$ per

Carat

Nov-12

3,580

$0.51

$143

Jul-13

3,123

$0.42

$133

Sep-13

4,753

$0.86

$180

Oct-13

3,863

$0.58

$150

91.7

$0.82

$8,924

15,410

$3.18

$206

Date

*

Oct-13

Total

* First Large Gem Quality Diamond Sale

They currently have 1,500 carats of rough diamonds in inventory for sale this quarter.

In February 2014, the company announced the recovery of a 43.9 carat gem quality diamond (see image below),

which will also be sold in this quarter. In October 2013, the company had sold its first large gem quality

diamond (91.7 carats) for US$818k; or US$8,924 per carat.

Diamcor 43.9 Carat Gem Quality

Source: Company

DMI is continuing with its testing and commissioning activities at Krone Endora, with the goal to move to a 24/7

operation. Management expects production to reach 10,000 carats per months within the first 12 months of

commercial production.

? 2013 Fundamental Research Corp. ¡° 10 Years of Bringing Undiscovered Investment Opportunities to the Forefront ¡°

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Page 3

We will start reporting our revenue and EPS estimates once the project reaches commercial production; which is

when the company will have a regular production / sales schedule. We will be issuing an update report, based on

the Q3 financials, shortly.

Daniel Iwata, BA, Dip. Fin. Mgmt.

Equity Research Associate

Downturn provides opportunity for The Cash Store

Shares of The Cash Store (TSX: CSF) have undergone a steep decline from February 13, 2014, dropping from

$1.04 to the current price of $0.33. The major reason for the significant decline was the Ontario Government

denying the company a payday loan license. This has caused CSF to halt their operations in Ontario, which have

accounted for approximately 34% of their loans. CSF operates locations under the name The Cash Store and

Instaloans, and have 175 locations in Ontario. Throughout Canada they have 510 locations.

The Cash Store has been receiving increased scrutiny over the last year for charging in excess of mandated

payday loan rates, and not providing customers with their loans immediately. Concerns have been raised over

The Cash Store issuing debit cards, requiring customers to then withdraw cash from their debit machine,

incurring additional fees. There have also been concerns over their payday loan product, which was structured

similar to a payday loan; however, it charged interest above the mandated maximums. In January 31, 2014, The

Supreme Court of B.C. confirmed an order by Consumer Protection B.C. to return $1 million in fees collected

from customers , due to rates in excess of the Province¡¯s maximum.

The company generated revenue from interest and fees of $190.77 million in Fiscal 2013, and $187.41 in

FY2012. The company reported a net loss of $35.25 million in FY2013, and $56.88 million in FY2012. In

FY2011, they reported revenue $ 190.00 million and net income of $14.67 million. The Cash Store underwent a

big shift in strategy in 2012. Previously, they sold their loans to third parties. In 2012, they began to directly

issue loans to individuals. To do this, the company raised $132 million by issuing 11.5% bonds, and began

directly issuing and holding loans.

I feel that The Cash store has a strong market position for payday loans with approximately 33% of the payday

loan locations in Canada. I feel that their customer base and locations would warrant a higher value than their

current market cap. Even though they have significant debt, their expenses have been declining since 2012. I

believe that the withholding of their licenses will force a significant restructuring, and increase the company¡¯s

compliance with payday lending laws. The company has already formed a special compliance committee and

? 2013 Fundamental Research Corp. ¡° 10 Years of Bringing Undiscovered Investment Opportunities to the Forefront ¡°

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Page 4

appointed a new Chief Compliance and Regulatory Affairs Officer. In my opinion CSF has good long-term

prospects and would encourage investors to closely follow their news updates as they appeal their Ontario

license.

Pooneh Ruintan, MEcon. Msc. Finance

Equity Research Associate

Mortgage REITs

In my column this week, I will provide some insights into mortgage REITs (¡°m REITs¡±) as an asset class.

M REITs invest and own property mortgages. These REITs loan money for mortgages to owners of real estate,

or purchase existing mortgages, mortgage-backed securities, or asset backed securities. Their revenues are

generated primarily by the interest that they earn on the mortgage loans. Fewer than 10% of REITs are m REITs

and 90% are equity REITs (¡°e REITs¡±). E REITs invest in, and own real estate properties, and their revenues

come principally from rent.

According to our research, the U.S. has about 40 m REITs, with a total market cap of about $64 billion, while

Canada has no mortgage REITs. Currently, the m REITs sector generates an average yield of 13%, compared to

30-year Treasury bonds which have a yield of 3.6%.

As m REITs generate income by borrowing at short-term rates and investing in higher-yielding mortgage-backed

securities or buying long-term bonds, they are sensitive to interest-rate swings. Over 2013, m REITs showed

weak performance (lost 3% on average, while S&P 500 was up about 30%).

In 2014, the worry about m REITs is rising interest rates, because as interest rates rise, bond prices will fall.

However it should be noted that m REITs are not really bond funds, but are businesses that use complex hedging

strategies to protect themselves from rate increases. Moreover, no single interest rate determines a m REIT¡¯s

profitability. Instead, it's the spread between long-term and short-term rates which affects an m REITS return.

The greater the gap between short-term borrowing rates, and what long-term bonds are yielding, the more

profitable a mortgage REIT will be. With the rate on 3-month Treasuries at 0.05%, and 10-year Treasury notes at

2.6%, the spread between the two has almost never been wider in the last several years. As a result, the profit

margins of m REITs are high.

? 2013 Fundamental Research Corp. ¡° 10 Years of Bringing Undiscovered Investment Opportunities to the Forefront ¡°

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Page 5

Analysts estimate that the average mortgage REIT now trades at a 20% discount to the book value of its

underlying portfolio, and in 2014, the sector is forecast to deliver returns over 20%.

The biggest mortgage REIT is Annaly Capital Management Inc. (NYSE: NLY), which has a market

capitalization of $9.7 billion. Two small-cap REITs, American Capital Mortgage Investment Corp (Nasdaq:

MTGE), and AG Mortgage Investment Trust Inc. (NYSE: MITT), both invest in higher-yielding mortgage bonds

of lower quality. These two REITs trade at about 15% discounts to their book values, and have dividend yields

of 14%. Also, they're largely hedged against rising rates.

? 2013 Fundamental Research Corp. ¡° 10 Years of Bringing Undiscovered Investment Opportunities to the Forefront ¡°

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

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