Fairfax starts coverage of DiamondCorp

Broker Fairfax has initiated coverage of kimberlite explorer DiamondCorp (AIM: DCP), calling its flagship Lace Diamond Mine in South Africa a long-life mid-tier asset that could potentially turn the company into a takeover target if appropriate funding is secured for its development.

The report noted that the market conditions that made it difficult to raise money and have caused financial difficulties and the current debt of US$5 million are reflected in the share price, limiting its growth. This issue, however, is being addressed by the company. The broker highlighted a recent £7.1 million fundraising, saying it will help the company meet this year’s payment obligations, enabling it to recommence development and complete a 30 kt (kilotonne) bulk sample that will confirm the resource and determine the economic potential of the asset, giving investors reassurance about its upside and lead to what the broker said would be a “major re-rating.”

The funding still does not cover all of the company’s needs and Fairfax estimates it will require another £5-6 million, expecting it to raise a further £6.5 million at 12 pence, which compares favourably with the stock’s current market value of 7.8 pence for a market cap of nearly £11 million.

Fairfax values the Lace Diamond pipe based on conservative assumptions provided largely from independent consultants Snowden and company data. "At this stage of development we are using a high discount rate of 15% which values the project at US$53m, which when factoring further equity dilution to complete the project leads us to a 17p price target. There is considerable upside potential in the value of the project as the grade, diamond value and dilution assumptions could be conservative," it said.

The company has already completed full feasibility studies. The mine has a nearly new 1.2 Mtpa (million tonnes per annum) diamond recovery plant, a partially developed decline, a mining fleet and full permits and a historic shaft that needs refitting. If 1.2 Mtpa of ore is produced, the yield during the first few years of operation is expected to be at 230,000 cpa (carats per annum) with a potential increase to 430,000 cpa after deeper grade material is accessed.

Fairfax said that the resource is sufficient to support a mine life to around 2038.

There could be further upside as production is expected to start in 2012, when diamond supplies are expected to tighten. Fairfax currently expects the company to post revenues of £18.2 million in 2012, making for pre-tax profits of £6.2 million.

The Lace main pipe contains 33.12 million tonnes of kimberlite in indicated and inferred resources, to the 855m, at an average grade of 40.12 carats per hundred tones (cpht), for a contained resource of 13.29 million carats of diamonds.

DiamondCorp has recently received a vote of confidence from boutique discretionary fund manager Majedie Asset Management, which bought 14.5 million shares in the company to take its stake to 10.16%.

http://www.proactiveinvestors.com.au/companies/news/6414/fairfax-starts-coverage-of-diamondcorp--6414.html