In the media

Development Work At Diamondcorp’s Lace Kimberlite Mine In South Africa Continues Apace

28 September 2010


Author: Alastair Ford

Shares in Diamondcorp have jumped by more than 20 per cent over the past couple of weeks, up from 6.61p to 8.63p, as the markets have returned from summer recess and taken stock of where the company is, and where it’s likely to go. Since July the shares have actually risen by more than a third, but not many people were trading then, and the July price of 6.10p was actually an all-time low, so from there, not to put too fine a point on it, the only way was up.

There’s no denying that Diamondcorp shareholders have had a tough time of it over the past few years, as complications with the resource at the flagship Lace kimberlite project in South Africa combined with the vagaries of the financial crisis to send things off course. Once upon a time, Diamondcorp had production, from a tailings re-treatment operation at Lace. But the economic crisis killed that off. Then it began to move towards the redevelopment of the old workings at Lace, but progress was held up when it turned out that more of Lace had been mined out than had previously been thought. Now the company is coming round for a third pass, and this time it looks as though Lace might once again be brought back into production, always allowing that the right boxes are ticked along the way.

The company is currently two thirds of the way through the construction of a decline that will allow it to access Lace in a big way below depths of 240 metres. The budget for the decline was set at £4 million, and Diamondcorp chief executive Paul Loudon reckons that he’s well on target to meet that budget. He’s also coming in slightly ahead of schedule, such that he’s now able to say, with confidence, “we anticipate entering into the kimberlite by the end of this year”.

This decline is crucial to the development of Lace, and to the development of the company, in that it will allow bulk sampling at depth to begin in January. Following on from that, in February, Diamondcorp will then be able to issue definitive results as to carats and grade at Lace, and, with any luck, to move rapidly into production. First, though, it will need to raise around £7 million in additional funding in order to refurbish the six metre by two metre vertical shaft at Lace, to get some equipment debts paid off, and to provide for initial working capital. Paul is hopeful that he’ll be able to undertake that fundraising at a share price that’s considerably higher than the current 8.63p.

And there are several reasons why he’s probably justified in that hope. One is that, on the basis of previously gathered data and received wisdom from some of London’s leading number crunchers, there are good grounds for hoping that the bulk sample from Lace will deliver a grade of 24 carats per hundred tonnes at a valuation of around US$120 per carat, and show that an operation producing 300,000 carats per year is quite feasible. Quite possibly it will be better, but even on that basis, some City analysts reckon the company could be worth between 17p and 20p per share.

The evidence from the recent upward movement on the market seems to be that some investors are taking positions early. And why not? The rough diamond price is strong, global demand remains high, supply is currently constrained, and De Beers continues to produce at below capacity. Lace looks likely to provide Diamondcorp with around 25 years of sustainable cashflow, throwing off operating earnings of around US$18 million per year. What’s more, small stones, of the type Lace has in abundance, are in increasing demand in China, which is now the world’s second largest consumer of diamonds, and that was a factor that loomed large in Rio Tinto’s recent decision to go underground at the world’s biggest small stone producer, the Argyll mine in Australia. All of that, argues Paul, makes the world a very attractive place for Diamondcorp at the moment.

The company now needs to deliver on its decline development, and show that Lace really does offer the kind of carat and grade that have been promised. It also needs to convince sceptical and engineers and developers that it can complete the dewatering of Lace successfully. With all that likely to fall into place over the next few months though, it would hardly be surprising if the shares did re-rate. If they did, they would be conforming to the standard share price pattern that mining companies show in the transition from exploration and development into production. In Diamondcorp’s case, that transition has taken a little longer than anticipated. The next trick will be to see if it can turn its grass roots exploration in Botswana to real account. The early signs there are good too, but that’s a story for another day.

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