DiamondCorp: bread, butter and jam

Many smaller diamond players have fallen by the wayside in recent years, as the credit crunch flattened diamond prices. Plucky DiamondCorp is one to have held on by its fingertips and now it has raised £7.1 million to get things moving again. Its long-life mid-tier Lace mine in South Africa should be up and running by next year, in the event of which, the company could well become a target for a larger player. What’s more there is blue-sky upside on top, with exciting exploration interests in Botswana.

Forgetting blue skies for now, the bread-and-butter for DiamondCorp, which is listed on AIM in London and the  Alt-X market in South Africa, is its Lace mine, situated some 200 kilometres south-west of Johannesburg, near the town of Kroonstad in the  Free State Province.

Historic Lace
Lace had been mined early in the 20th century, with around 750,000 carats extracted down to a level of about 240 metres below surface. When the diamond price crashed during the Great Depression, the mine was shut down but kept de-watered since the late 1930s. The De Beers Corporation bought the project in 1949 along with many others as part of their plan to corner the market and control diamond  prices. They bought the mine, like many others, with the sole purpose of keeping them shut. But South Africa and other countries have introduced ‘use it or lose it’ mining legislation so that if companies like De Beers aren’t using their mines they have to sell them. It was under these legislative measures that DiamondCorp, which was put together as a private concern in 2005 to develop Lace, acquired the mine in conjunction with its black empowerment partner Cyril Ramaphosa, giving  DiamondCorp a 74% share of the mine.

The Lace pipe has been drilled by the company to a depth of some 855 metres, with indications that there are 35 million tonnes of untapped kimberlite between the current 240 metre base level and 855 metres. With 0.5 million carats extracted a year, this should produce a mine life of around 25 years.

These developments at Lace were all going smoothly until the diamond price fell off a cliff in 2008 due to the credit crunch. ‘We entered our annus horibilis’ says chief executive Paul Loudon, recalling that just before this hit, the company had taken on $5 million of debt to buy the last of its equipment for the mine. Furthermore, in order to progress the development of the mine and access the ore reserves, Loudon faced a large £7m shortfall to fund the development of a 4.5 metre by 4.5 metre decline tunnel to allow trucks and loaders down to the 240 metre level. ‘We spent the majority of 2009 trying to close that gap. We had to put the company into a holding pattern. It was survival.’

Happily, funding was secured in April after the diamond price recovered and investors returned to the sector.

After paying down debts to around $4 million, current cash of £5.4 million gets the company through the construction of the decline and initial mining of kimberlite at the 240 metre level (as well as some spending in Botswana). ‘That will prove the grade at that level,’ says Loudon. ‘We’re anticipating 24 carats per 100 tonnes. At $120 per carat, the rock value is $30 per tonne; so at a cost of $14 or $14 it’s not a skinny operating margin. 50 per cent. And we’ve got a plant we know works.’

During 2011 Loudon says the company will be mining at 13,000 tonnes per month while setting up the sub-level caving underground mine plan and refurbishing the existing vertical shaft, which will be used for hoisting and allow the decline to be used for men, materials and ventilation. 

‘By the Q1 next year we will have accessed our resource at the 240-metre level. We will need to raise money in 2011 to bring production up to full scale of 1.2 million tonnes per annum by the end of 2011.’

House broker Cenkos calculates that Lace would generate cash-flows of £3m from 2012, rising to approximately £15m from 2015 - assuming annual production of 230,000 carats from 2012 and 400,000 carats by 2015.

Botswana blue sky

As well as the relatively predictable Lace mine, Loudon has secured interests in some ‘blue sky’ in Botswana, as he describes it. This project, Jwaneng South, also acquired via the ‘use it or lose it’ laws , will see DiamondCorp earn a 77.5% share once it completes a definitive feasibility study on at least one of the kimberlites over a period of five years. The primary exploration area just eight kilometres away from De Beers’ Jwaneng Mine, the largest and richest diamond mine in the world by revenue.

Of the five targets, the three most prospectivewere surveyed with ground gravity and magnetics last year. These revealed  10-hectare, 5-hectare and a 5-to-15-hectare kimberlite targets which will be drilled. Two vertical drill holes in 2009 both  intersected calcretised kimberlite under just 20 metres of sand, weathered kimberlite at about 40 metres and fresh kimberlite form 70 metres to the end of the hoes at 300 and 340 metres. Sampling provided that this pipe is diamondiferous.

‘But we won’t know grade until we do a bulk test, which is expensive,’ explains Loudon. ‘This year we’ll drill the other two pipes, commencing in June and we will have the results after the summer. Then we will make a decision on which target will do the large diameter drilling. That will be in Q1 of next year. We have good expectations. Any one of them could hold a mine larger than Lace.’

But while the geology nearby provides encouragement, only a small percentage of kimberlites are diamondiferous and of that only a small percentage are economic. So although a degree of luck is needed, Loudon is very encouraged that the surveys have shown the pipes to be bigger than previously understood, the first pipe drilled does contain diamonds and the sand cover is less than expected .

With rough diamond prices expected to rise long term due to tightening supply, the redevelopment of Lace will put DiamondCorp firmly on the map while prospects in Botswana look very exciting.