In the media

DiamondCorp: Kroonstad’s pink allure

23 October 2014

Source: Financial Mail

Author: Allan Seccombe

DiamondCorp, which is building a rare kimberlite diamond mine, will keep its focus on this operation to maximise returns to shareholders rather than chasing growth by adding other projects, says CE Paul Loudon.

DiamondCorp is spending about R750m to develop an underground mine at Lace near Kroonstad in the Free State. Lace was mined at the start of the 20th century but shut down by De Beers in 1939. Meanwhile the company has been treating tailings, the waste that came out of the processing plant after the former owners extracted diamonds from the ore.

The underground portion will come into production in the first half of next year, six months earlier than planned. The surprise find of an area called UK4 will give early output.

During the following 18 months DiamondCorp will develop a deeper block cave operation, which is currently planned at a depth of 470m but could be 30m deeper to add 1.5Mt of ore, Loudon says.

A study into the slightly deeper, marginally more expensive option is under way and will be completed in the first quarter of next year, he says.

DiamondCorp is unusual for a mining company in having a single asset and single commodity, which most companies regard as strategically risky if something goes wrong operationally or if the price of the commodity falls sharply.

DiamondCorp is not averse to growth, Loudon says. However, it has not seen any opportunities so far to match the internal rate of return that Lace promises — more than 50% — or its forecast operating margin, also more than 50%. The investment in the mine will be paid down in two years, leaving the company free to return cash to shareholders, he says. The expected life of mine is 25 years.

“Many CEs get caught up in the noise, or the corporate equivalent of peer pressure to grow at almost any cost. We don’t suffer from that in Kroonstad,” Loudon says.

DiamondCorp plans to pay special dividends based on auctions once or twice a year of its pink and purple diamonds, he says. The Lace mine, which received a cash injection of R300m from a capital raising by DiamondCorp, will repay that money, which will then be used to buy back shares.

Delegates at a diamond exploration conference in Kimberley last month heard from a number of speakers how exceptionally scarce economically viable kimberlites are and that companies like De Beers are expecting a widening gap between supply and demand from the end of this decade.

It could make DiamondCorp a takeover target, Loudon says. Its share price is at 7p — less than a third of the 29p net asset value DiamondCorp claims. But he says shareholders will accept only the cash equivalent of NAV.

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