In the media

Polish for a rough diamond

11 April 2008

Source: Financialmail

Author: Nicky Smith

Owner of the Lace mine recommended as a buy by London analysts

DiamondCorp breathed new life into SA's diamond mining history this week with its secondary listing of 35m shares on the JSE.

The company's primary listing in February last year on London's Alternative Investment Market (AIM) raised £2m. Before this it had raised £10m privately.

DiamondCorp has a single asset, the Lace mine in the Free State. It is about 20 km outside Kroonstad, close to Voorspoed, De Beers' mine in construction.

Lace is not a new operation – it was first mined from 1898 to 1930 – and it has a colourful history. It was initially owned by Randlord John Dale Lace, who floated it on the London Stock Exchange. Dale Lace lost his fortune when stock markets crashed in the 1907 Banker's Panic, and the mine was bought by UK–based Crown Mining.

Crown operated the mine until 1930, when the bottom fell out of the diamond market. Nine years later, in the confusion following the outbreak of World War 2, De Beers bought it.

Curiously the mine was not worked again until 1997 – when the "use it or lose it" principle became SA minerals law – and then only on a limited basis by Christiaan Potgieter, possibly SA's largest private diamond producer with his company Sonop.

DiamondCorp MD Paul Loudon, a former mining journalist, stockbroker and merchant banker, says Potgieter had an agreement with Canadian company Rupert Resources, which had the option to buy 70% of the project for US$30m. Rupert Resources drilled to establish the extent of the ore body and, after spending C$9m, the company decided to exercise its option.

But its timing couldn't have been worse: the Bre–X mining scandal broke, upsetting the junior mining market in Canada.

In the mid to late 1990s Toronto–listed Bre–X Minerals had a gold deposit in Borneo. It told the market it was sitting on a monster gold deposit of between 70m and 200m ounces. The share price rocketed.

But when the core samples were tested independently, it was found they had been "salted": gold dust was mixed with the samples to boost the grade.

The share crashed. In early March 1997 Bre–X geologist Michael de Guzman jumped or fell out of a helicopter into the Indonesian jungle. His body was discovered four days later, partially eaten by animals. He was identified by a thumbprint and molars. Years later, however, one of his wives claimed to have received money from him. The Guzman story still enjoys column inches in Canada.

Bre–X founder David Walsh protested his innocence. A year later he died of a stroke in his Bahamas home, three weeks after being held at gunpoint by masked men who demanded money.

The scandal cost investors billions, created extreme wariness towards new miners, and prompted tough regulation of the Toronto stock market. Rupert Resources was forced to walk away from the project.

The company's misfortune was to be the making of DiamondCorp. In 2005 it bought the mine from Potgieter for just R15m.

Loudon left his merchant banking job at Loeb Aron in London, after being asked to advise the company ahead of its capital raising.

"This was without a doubt the best project that had crossed my desk in a long time," says Loudon. "So good, I was happy to put my own money into it."

He says the company has experience in building mines and has successfully commissioned diamond mines in Zimbabwe, SA and Indonesia. "We understand the commodity and we like it."

Phase one will be retreatment of the tailings dump from the old pit. A plant capable of treating 1,6 Mt/ year has been built and will be used to treat tailings over the next two and a half years. All stones recovered from tailings will be sold on tender within SA.

The average size of the stones is one–thirteenth of a carat, but one of 17 ct and another of 14 ct have also been recovered.

Phase two will be mining the part of the kimberlite pipe below 100 m – the depth to which the pipe was mined by the open–pit method. This phase will take mining down to 855 m.

This is the depth to which knowledge of the Lace kimberlites extends, but the company says drilling has also revealed one holding as much as 60 ct/t. The historical grades for the Lace kimberlites are 27 ct/t.

A research report by Will Dymott from London–based analysts Cenkos Securities recommended the stock as a buy late last year: "DiamondCorp has budgeted cash flow of £1m over the first two years for exploration over a highly prospective area that should provide significant upside."

Loudon says the discovery at Lace of a variety of coloured stones, known in the diamond industry as "fancies," is exciting. Fancies can be sold for tidy premiums depending on their size.

So far, however, most of the stones from the tailings retreatment have been small but of high quality.

According to Dymott, the company's first tender parcel was assessed by WWW International Diamond Consultants, which said the colour of the Lace stones were "above world average". The Lace deposit also seems to hold a high proportion of purple stones. More than 80% of stones recovered so far are of gem quality.

Being a single–asset company is risky, says Loudon, but "we are not going to do acquisitions just for the sake of buying something. We've got what everyone wants, and it's not in Angola or the Congo."

He believes consolidation will take place among the mid– to small–tier diamond companies. "We have two targets on our radar and we're in the preliminary stages of negotiating. We would like to have completed at least one acquisition within the next 12 months. One way or another, mergers and acquisitions will happen. And we are not averse to that, as long as the price is right."

Asked what role the company would like to play, Loudon says it is an alternative to companies such as De Beers or BHP Billiton when it comes to partnering junior companies wanting to move from exploration to production. "We would see ourselves as a senior partner in a joint venture, and we'd be able to move faster than a major," he says.

Meanwhile the company is focusing on the underground development feasibility study, scheduled for the end of the first quarter next year.

DiamondCorp was recently trading at about 96p on AIM. This is equivalent to the listing value when Dale Lace floated it in 1898. Says Loudon: "It shows the market is an efficient valuer of assets."

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