Investors probably know the names of one or maybe two diamond mining companies, but it is a specialised sector and the smaller operators tend to be relatively unknown. London-based, West Africa-focussed Stellar Diamonds plc (LON:STEL) plans to put itself firmly on the map by increasing its production and achieving significant development and exploration success. We take a look at this highly ambitious newcomer whose goal is to also pursue regional consolidation opportunities and emerge as the leading integrated diamond miner in West Africa.
The Origin and Location of Diamonds
Before discussing Stellar Diamonds more fully we will look briefly at how diamonds formed and where they can be found. Diamonds were formed in the very ancient past, between 1 billion and 3.3 billion years ago, from carbon-containing minerals which were under great pressure but at comparatively low temperatures of 900 to 1300 degrees centigrade. This unusual combination only occurs in ‘cratons’ in the lithospheric mantle, at depths of some 140km to 190km; the cratons are the coolest, oldest parts of the continental crust.
The diamonds reached the Earth’s surface through ancient volcanic eruptions originating at those depths. Most volcanoes flow magma from about one-third of that depth and therefore cannot contain diamonds. The kimberlite pipe, through which the diamonds are carried in the mineral ‘kimberlite’ in the magma, is typically a few hundred metres to a kilometre in diameter at surface, where it widens. These pipes generally feature a sheeted dyke complex at their root, which extends into the lithospheric mantle. The material containing the diamonds is relatively soft; this allows the diamonds to be removed through natural or human processes. The volcanoes and what is left inside them are eroded over geological time and are therefore currently at varying stages of erosion. This weathering process slowly releases diamonds, which can be moved by the action of water in the ancient or more recent past to form rich alluvial deposits that could be easily mined using simple methods. These alluvial sources were the basis for the early diamond industry in India, which began about three thousand years ago.
As explained above, most volcanoes cannot contain diamonds; moreover, only about 1 in 200 kimberlite pipes contain gem-quality diamonds. The industry currently believes that the demand for diamonds will begin to outstrip supply from about 2012 and anticipates strong upward trend in demand, as growing markets in India and China build upon the existing consumer base. The number of diamondiferous kimberlite pipes worldwide is not high, and it is believed that it will be hard to maintain supply at today’s levels. Indeed, it is currently claimed that “there are only around 25 economic diamondiferous kimberlite pipes known in the world” (Libertas, “Diamond Sector Review”, 30 July 2010). On this basis, significant rises in diamond prices from about 2012 could arise from the imbalance of supply and demand. Stellar diamonds are of that opinion and are seeking to capitalise on such price increases.
West Africa – Stellar’s focus
Africa is popularly seen as the centre of the diamond mining industry and with good reason: about 60% of the world’s diamonds are currently mined there. The other key areas are Russia, Canada and Australia. Around 130 million carats are currently produced per annum worldwide. West Africa has favourable geology for diamond production, because it contains the Man Craton. It is believed that some 200 million carats, worth over $15 billion, have already been mined there. Its diamond potential is relatively unexplored; the political situation has improved, and favourable mining codes seek to encourage investment. Stellar Diamonds operates in two countries: Sierra Leone and Guinea.
It is currently believed that extensive erosion of some 1 to 2 kilometres has occurred in this region since the Jurassic period when the kimberlite pipes were formed; for example, Stellar’s Tongo kimberlite dyke asset in Sierra Leone is some 140 million years old, and its Droujba kimberlite pipe asset in Guinea is some 153 million years old (Skinner/Apter/Morelli/Smithson, “Kimberlites of the Man Craton, West Africa”, 2004) . Diamonds can be found at surface as alluvial deposits, or in kimberlite dykes where these are accessible, or in the kimberlite pipe itself. The Stellar portfolio is reviewed below under those three categories – there are two alluvial mines currently in production, three kimberlite dyke projects, and one kimberlite pipe project. These latter projects include a mothballed diamond mine and also a part-completed mine dug in the 1960s. Alluvial Mining
Stellar Diamonds currently has two operational alluvial mines, both in Guinea. The company’s strategy is to build production from these mines, whilst in parallel pursuing exploration and development work in the rest of its portfolio, where it believes considerable long-term value is potentially to be released.
The Mandala mine commenced production in April 2009, and to date more than 80,000 carats have been produced with sales of over $3 million. This production is currently being expanded, and the intention is to produce more than 12,000 carats a month in the near future. The anticipated annual revenue from this is around $5.4 million. The average grade is around 40 carats per hundred tons, which is high relative to alluvial mines which work at around 1 cpht. Whilst the diamond value is not particularly high, the grade gives an attractive margin and some high value gems and fancy colours have been mined; stones of 11, 12, 13, 31 and 37 carats have been found so far. Further successes of this type can be expected. The resource at this mine is put at 790,000 carats, so at that rate of production the mine would last until 2016.
The Bomboko mine is located northwest of Mandala, and is currently rather less developed. The exploration target is virtually identical to Mandala, at 750,000 carats, with the current inferred resource at 40,600 carats. Bomboko is particularly important to the company because of the size and quality of the diamonds. Past artisanal mining reportedly found stones of 100 and 125 carats, and initial trial mining by Stellar has produced more than 4,100 carats with 53% of gem quality, ranging up to 16.3 carats. The company intends to increase monthly production capacity to 4,000 carats by the end of 2010, which would then represent an annual revenue of some $5.7m because of the high prices that these diamonds are expected to command. The life of this mine clearly depends upon confirming the increased resource level: at 48,000 carats per annum, the inferred resource would be quickly exhausted. But if the exploration target could be confirmed, the mine would produce for much longer. The company has recently decided to prioritise resource work over production in the near term, in order to increase geological confidence. Investors will be watching closely for news on Bomboko resource levels as the works proceed.
Kimberlite Dykes
Stellar Diamonds currently has three kimberlite dyke assets, two in Sierra Leone (Kono and Tongo) and one in Guinea (Bouro). The company believes that these projects offer good longer-term potential but resource estimates have not yet been established.
The Bouro kimberlite dyke is adjacent to the Mandala alluvial mine which we outlined above. It is 5 kilometres in strike length, and previous sampling gave grades of up to 500 carats per hundred tons of rock, which is exceptionally high by world standards. The company plans to undertake surface bulk sampling, using the facilities at Mandala, to establish with more confidence the diamond grade and quality. This would then be followed, given good results, with underground bulk sampling or trial mining; the close proximity to the Mandala resource seems to be an encouraging sign at this stage, but success can never assumed until work is completed and assessed. That said, it seems quite likely that the sampling will reveal a similar value to that of the Mandala diamonds; if this proves to be the case, the combination of some $40 per carat and a high grade would give good potential margins of economics.
The Kono Trial Mine in Sierra Leone is a series of high-grade kimberlite dykes. It is substantially capitalised: $17m has been spent to date on it, and trial mining was becoming established when the world price of uncut diamonds collapsed in early 2009 as a consequence of worldwide chaos in the banking sector. The diamond cutting industry is peculiarly structured, with its stock largely funded by short-term bank loans – it was almost uniquely vulnerable to the chaos. Demand for uncut stones collapsed almost overnight; in order to preserve cash, mining had to be halted and the project put onto a care and maintenance basis in May 2009. This was most unfortunate, because the mining was starting to give some good results: the diamonds from the “Pol-K” kimberlite at a depth of 65 metres were realising $152 per carat before the price collapsed, and stones of about 10, 11 and 12 carats had been found within the total of 4,200 carats mined by the end of April 2009 when work was suspended. The grades were also encouraging: 66 cpht from the Pol-K shaft, and 140 cpht from the Bardu kimberlite, which are good by international standards. With diamond prices having recently rebounded, it is unsurprising that the company is currently looking at the possible resumption of mining operations.
In Sierra Leone, Stellar have 4 high grade kimberlite dykes at their Tongo Kimberlite Project. These have a strike length of some 3 kilometres and extend into the adjacent licence held by Koidu Holdings. Koidu have achieved bulk sample grades of 196, 248 and 288 carats per hundred tons, which are very high by international standards and represent encouraging evidence for Tongo. So far, Stellar has completed two mini bulk samples, which have given around 90 carats per hundred tons in Dyke 1 and around 100 cpht in Dyke 2. The diamonds were all of gem quality, which is very encouraging, and Dyke-1’s diamonds were recently re-valued at $144 per carat. The company is installing plant in the current quarter to process bulk samples from Dyke 1, to determine the grade and value with more confidence. The plan is to obtain a bulk sample of 1000 to 2000 carats to be collected and processed. A good result here would clearly be of some considerable significance for both the company and its investors; Stellar currently describe it as “a key value driver for growth”. A dyke project of this type should be relatively manageable in terms of human resource and capex requirements. Results are expected toward the end of 2010.
Kimberlite Pipes
The classic image of a diamond mine is probably a very large man-made hole, chasing a kimberlite pipe down into the bowels of the earth. Stellar Diamonds has one kimberlite pipe project, in Guinea (Droujba).
The Droujba Kimberlite Pipe in Guinea is a mine which dates back to 1964. It is a high grade kimberlite pipe which was discovered by the Soviet Aid Mission and had been dug by Russians to a depth of 20 metres when work ceased, the chief reason reportedly being the hard nature of the kimberlite which led to generally poor recoveries in the treatment plant. Whilst the diamond value is unknown, the Russian team reportedly achieved grades of up to some 200 carats per hundred tons which is very high; De Beers estimated c. 150 cpht when the mine was in their ownership. Stellar Diamonds believe from studies done by West African Diamonds that ground geophysics indicate that the pipe could be larger than the 1 hectare area that was originally assessed during the Russian operations. West African Diamonds also identified four nearby exploration targets.
The original hole is still there, essentially unchanged; Stellar plan to undertake drilling and bulk sampling in order to define the resource for a pre-feasility study. Historical reports gave an estimate of 2.1 million carats in the mine, from surface to a depth of 120 metres. The mine would appear to have considerable potential, subject to the value of the diamonds and the level of recovery etc.
Management Team
Stellar Diamonds has a board consisting of seven directors, all of whom have extensive mining industry experience as well as experience of operating in Africa. The directors have a proven track record of developing mines. The Chairman, Lord Daresbury, is non-executive and there are four other non-executive directors. With five non-executive directors in all, together with a CEO and a CFO, the board structure reflects current thinking on good practice, particularly so for a small company.
Financials
Stellar Diamonds was admitted to AIM in February 2010, following private funding of over £10 million between 2007 and 2009, and funding in 2010 of £5 million. Until 2010 the company had been private, and it merged with West African Diamonds so that the joint assets could be moved forward more effectively. In May 2010 RBC assessed the company’s Net Asset Value at $42.28 million; this equates to some £26.4m which is an NAV/share of some 26p. At the share price at the time of writing, Stellar is trading at just 40% of its NAV level. The two producing mines are planned to achieve an annual revenue rate of some $11m per annum by about the end of 2010. The company has recently given guidance that it currently has around $0.8 million in terms of cash and stock, and is cashflow positive.
The company’s kimberlite projects are relatively straightforward and of low capital expenditure in comparison to many high-capex diamond mining schemes for example those in Russia. The company has indicated that they could potentially be individually implemented within timescales of some 18 months to 2 years, from planning to commencement of production. Stellar currently believes that the two existing alluvial mines should support the company until about 2016 to 2017, which offers a considerable window within which the three kimberlite dyke projects and the kimberlite pipe project can be moved forward as appropriate.
The heavy discount to Net Asset Value suggests that considerable potential upside is ‘in for free’. The highly experienced management team, the multi-project portfolio including two producing mines, the positive cashflow and the positive outlook for rough diamond prices are all encouraging signs. The next twelve months could prove to be an exciting time for investors as Stellar Diamonds reports progress on its various projects.
The author holds shares in Stellar Diamonds.
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