Thursday, September 22, 2011
DiamondCorp poised for next stage of development
DiamondCorp (LON:DCP) is expected to move onto its next phase of development in the coming weeks as it confirms the diamond grades from Lace kimberlite pipe, says Fairfax mining analyst John Meyer.
Today, in its interim results statement, the group said it has made significant steps towards its goal of becoming a long-term diamond producer. In recent months it has focused on the ongoing underground development programme at the Lace mine in South Africa, where bulk sampling below historic mine workings is returning encouraging results.
This initial mining operation, to recover the samples, has now reached an area of the kimberlite with higher grades that is ‘significantly better’ than on the western side of the pipe, where it encountered lower grade and stony ground at the start of the programme.
Chief executive Paul Loudon told investors that DiamondCorp is now determining the grade and carat value at the top of the first mining, block and he expect that the group will have this information next month.
“The team continue to progress the bulk sample with the last two samples showing that grade is significantly better than first estimated,” Fairfax analyst John Meyer said in a note to clients. “We can now see potential for the bulk sample to exceed 24 carats per hundred tonne on sampling of more fresh kimberlite.”
Importantly Meyer believes that the produced diamonds from the bulk sampling will be sufficient to cover a ‘significant portion’ of the mine development costs.
“The sale of stones from the bulk sample and from ongoing mining should cover a significant portion of the cost of developing the larger underground infrastructure depending on prices achieved,” he added. “New funds for full development program will need to be arranged and could include some form of banking or offtake arrangement depending on market conditions.”
Meyer points out that while there are reports suggesting weakness in diamond prices, from the recent highs in July, prices for larger gem quality stones like many of those produced from Lace may remain strong due to growing demand in Hong Kong and China.
While there are question marks over demand for smaller stones the analysts said that thankfully the Lace mine appears to be producing a very high proportion of gem quality stones compared with other mines.
Fairfax has a ‘buy’ recommendation on DiamondCorp with a 23 pence a share target price.
Also commenting on today’s results was Ocean Equities’ Christopher Welch, the analyst said: “Encountering heavily diluted ore at the start of the bulk sample was unexpected, but as we believed, once through this ground the diamond grade has recovered to exceed initial expectations.
“There are several important implications from the bulk sample results announced to date.
“First, the initial ore to report to the plant (when operational in early 2013, if not sooner) will come from the area of the pipe as these current high grades. We have based our production model for the mine on a grade of 24 carats per hundred tonnes for the early sections of the caving operation and these results give us confidence that this grade will be achieved in mining.
“The second point is that although the soft ground is heavily diluted, it still contains high quality stones. Unlike many other operations, the dilution risk for the caving operation is relatively low because this soft ore is not barren.
“This gives DiamondCorp a good operating margin during production blasting.”
Meanwhile looking at impact a potential hiccup in diamond prices, Welch added: “It must be remembered that the diamond market is ironically opaque and less efficient markets than we see for commodities in general (diamonds do not have the homogeneity to be a commodity).
“In the longer term we believe that any softness in the diamond market will be met with a flight to quality so we will back the diamond mines with the highest quality stones, of which Lace is one of a small group.”
According to Ocean Securities DiamondCorp is undervalued based on the Lace mine’s value alone, nevermind the exploration projects in Botwana near De Beer’s Jwaneng mine – the world’s ‘richest’ diamond mine.
Welch said: “investors essentially have free participation in what could be a company-making kimberlite mine in its own right. The proximity of DiamondCorp’s exploration licence to the De Beer’s Jwaneng mine indicates the value of the exploration real estate in DiamondCorp’s portfolio.”
Today DiamondCorp also highlighted that work is ongoing on the J-01 kimberlite, which spans 10 hectares, about 10 kilometres southeast of Jwaneng, and a rig is currently on its way to the smaller J-05 diamondiferous kimberlite, which is nearer to Jwaneng.
In terms of its financials the diamond mine developer reported a £1.16 million net loss (compared to a £1.6 million loss in the comparative period of last year). During the period the group raised £3.48 million of new equity which is being used to facilitate the ongoing work at Lace and at the Botswana kimberlites.
“Having successfully re-accessed the Lace mine below any of the old workings, we are now determining the grade and carat value at the top of the first mining block and expect to have this information next month,” Loudon said this morning.
“At the same time, we have commenced our mini bulk testing programme on our two diamondiferous kimberlites in Botswana and expect to have these results before the end of 2011.”
So far DiamondCorp has processed a total of 14,211 tonnes of kimberlite and from this it has recovered 1,837 carats of diamonds. The company said that it is encouraged that the diamond quality remains consistent with the initial parcel, which was valued at an average of US$205 per carat at the SA Diamond Exchange last month.
“Approximately 40 per cent of the diamonds are larger than one-third of a carat, and more than 80 per cent of the diamonds are gem quality,” DiamondCorp said. The largest gem diamond recovered is 20.54 carats, and a 1.01 carat pink diamond has just been recovered.