Gem in merger talks with Lucara

Gem Diamonds is in talks with Lucara Diamond Company for a possible all-share merger that would allow the two to combine assets in southern Africa.

In a statement, the Gem Diamonds confirmed the talks were underway although they are still at an early stage.

"These discussions are at a very early stage and there can be no certainty the contemplated merger will occur or of the timing or terms of any such transaction," said Gem Diamonds in a statement yesterday. If the deal goes through, it would see AK6 Mine in Boteti and the soon-to-be-constructed Gope Mine in the CKGR coming under the same ownership.

Apart from Gope, Gem operates Letseng Mine in Lesotho as well as the Ellendale project in Australia while Lucara has a diamond project adjacent to Letseng, called Mothae as well as operations in Botswana and Namibia.

According to a weekend report by Bloomberg, Gem and Lucara - which are valued at about $606 million and $412 million respectively - have been in negotiations since February and have signed a confidentiality accord. Talks between the two companies may lead to the creation of a billion dollar mining house. Lucara, which took over AK6 Mine from African Diamonds, is currently constructing the mine with production set for early 2012.

Diamond producers are seeking new reserves as dwindling output fails to match demand in emerging-markets.

Global prices of rough diamonds rose 26 percent in 2010, beating pre-recession highs. Gem's Chief Executive Officer, Clifford Elphick, believes prices could climb 25 percent this year. Gem has a confidentiality accord with Lucara, Elphick said March 18 by telephone, one of eight Gem has with companies.

"Like any mining company, you're always reviewing all options," he told Bloomberg. "We've got internal growth options and we constantly review external growth." The AK6 project is slated to begin production early next year and is considered a "world-class" asset with potential to produce Type IIA and large rough diamonds, as does Mothae, which is currently in a trial mining stage.

AK6 is expected to have a throughput of up to three million tonnes a year in the first phase development, instead of the previously anticipated two million tons a year. Lucara, which last month announced it had raised P400 million ($60 million) for the financing of AK6 Mine in Boteti and Mothae Mine in Lesotho, says the Botswana diamond mine is expected to yield 400, 000 carats of high-quality rough diamonds in its first year.

On the other hand, Gem Diamonds last week unveiled a P550 million ($85m) cash chest for the construction of the first phase of its Gope underground mining project in the CKGR, which will add fresh production to the London Stock Exchange-listed outfit by 2013. Gem has $130m of cash and expects more to be coming in because of the strong recovery in rough diamond prices and demand.

After putting the Gope project on the backburner in 2009 as a cost-cutting measure and to stay afloat in the face of the global economic crisis, the company was awarded a 25-year mining licence by the government two months ago. Gem Diamonds envisages a phased approach to the construction of the mine, with an underground mine planned to improve the company's knowledge of the ore body, diamond valuation and metallurgical characteristics.

After an initial period of mining, production capacity will be scaled up to a higher steady state. The lifespan of Gope Mine is currently estimated to be in excess of 30 years. Gem Diamonds' wholly-owned subsidiary, Gope Exploration Company, is developing Gope Mine, which has a resource of 79 million tonnes at a grade of 18.5 carats per hundred tonnes (cpht).

The Gope deposit is estimated to possess 20 million carats of diamonds worth more than $3 billion and is expected to produce up to one million carats a year when fully operational. Gem Diamonds acquired Gope Exploration Company from De Beers and Xstrata in May 2007 for US$34.1 million, inheriting constant criticism due to involvement in the controversial CKGR.