DiamondCorp (LON:DCP) has appointed Michael Toxvaerd as a director to help finalise funding for the Lace mine in South Africa.

Toxvaerd has more than 15 years' experience of founding, operating, acquiring and integrating businesses in private equity and public markets and is chief investment officer of UK firm HBG Management Partners.

He is also a non-executive director of AIM quoted European Islamic Investment Bank (EIIB), which is interested in around 23.02 per cent of DiamondCorp's share capital.

Chairman Euan Worthington said today: "We are very pleased to welcome Michael on to the board and believe that his financial background will help to finalise the financing for Lace while his entrepreneurial experience will help us evaluate other opportunities in the diamond sector."

The company is currently developing Lace with initial production expected in 2013 and full production by mid-2014.

The strategy is not to remain a one mine company, but use the Lace mine as the cash flow generator on which to build a medium-sized mining company.

The mine is located in the Free State Province.  It was operational from 1901-1931 and was closed and flooded by De Beers as part of its efforts to control the diamond market.  It has a total resource of 13 million carats.

DiamondCorp (LON: DCP) said today its latest drilling at Jwaneng South in Botswana had recovered 23 macro diamonds of mostly clear gem quality.

The group added that the majority of the stones were fragments of larger diamonds most likely broken during the drilling process, though four pink diamonds were present.

The diamonds were recovered from the first five large diameter (455mm) drill (LDD) holes undertaken on kimberlite J-05 at Jwaneng South. 

The concentrates from each sample will be re-processed early in the New Year in order to ensure that no diamonds were missed. 

Once the samples have been re-processed, the data, together with the micro diamond data recovered from earlier exploration, will be submitted for modelling to determine an initial grade estimate, DiamondCorp said.

In the meantime, LDD drilling at kimberlite J-01 is continuing, with samples due to start arriving at Lace for processing in the New Year.

DiamondCorp's managing director Paul Loudon said: "We look forward to receiving final results and the grade modelling from the mini-bulk tests on both J-01 and J-05 in the first quarter of 2012. Only when the final data has been assessed and modelled will we have an indication of the grade potential of these kimberlites."

Jwaneng South is about 10 kilometres southeast of De Beers Jwaneng mine – the world’s ‘richest’ diamond mine.

It is issuing 31.6 million shares, around 13 per cent of the enlarged share capital, at a price of 6.5p each. The placing price represents an 8.77 per cent discount to yesterday’s closing price. DiamondCorp will use most of the funds to retire debt and accrued interest owed to Africa Opportunity Fund LP.

"I am delighted that with the support of our shareholders, DiamondCorp will now be completely debt free,” said chief executive Paul Loudon.

“This fundamental strengthening of our balance sheet comes at the same time as we have demonstrated that our flagship asset, the Lace mine in South Africa, will support a +25-year mine life, producing almost 450,000 carats per annum at peak production and generating life-of-mine cashflows of almost £500 million.”

Earlier this month DiamondCorp published revised development plans to by-pass the mine’s historical working and instead aim straight for the lower lying, higher grade kimberlite. 

This new plan has a capital cost of £11.4 million. The company now plans to secure project finance, rather than raise additional equity, to cover these costs.

Explaining the decision to seek project financing to complete the Lace development, Loudon added: "Markets for resource stocks are experiencing a difficult period at the moment, and financing the whole of the Lace mine development from equity capital cannot be done without an unacceptably high dilution to existing shareholders.

“Therefore management will now turn its attention to investigating sources of project finance for Lace in a form which provides the least dilution and maximum leverage for existing shareholders.”

Meanwhile Loudon also highlighted that drilling is underway in Botswana at the group’s ‘exciting’ diamondiferous kimberlites near De Beers' massive Jwaneng mine – the richest diamond mine in the world – and an initial grade indication is expected before the end of this year.

Diamondcorp PLC (LON:DCP) has raised exploration funding and working capital to the tune of £3.48 million, before expenses, in a placing of just under 26.8 million shares at the market price: 13 pence a share.

House broker Fairfax said the proceeds will enable the company to continue work and exploration at the Lace Diamond mine in South Africa and at the mini-bulk test on exploration in Botwswana. According to the broker, £1.5 million of the funds will be used for the mini-bulk test, including large diameter drilling of kimberlite exploration in Botswana, with the remainder of the funds being used for general working capital.

“The processing plant should now be processing kimberlite from the bulk sample [programme] to give a better indication as to the mine’s grade and economic value. We expect the company to update investors shortly on results from the extraction of the first part of this sample,” said Fairfax in a research note.

Bulk test results from the Lace mine are expected by the end of July.

"There were some big institutions involved wanting to get a toehold before the big financing at higher prices and pleasingly it has been done at the market price, with lots of unsatisfied demand,"  chief executive Paul Loudon told Proactive Investors.

Only last week, the group reported positive results of the cost review at Lace. The company achieved the main goal, which was keeping the operating costs to 105 rands per tonne and offsetting the anticipated increase in electricity tariffs.

With this main target met, the Lace mine could see its profit margins jump to over 70 percent if all goes to plan.

Loudon said last week: “The Lace mine has the potential to be a significant cash generator for DiamondCorp with more than 25 years of mine life. At current strong diamond prices, the initial minimum operating margin is expected to be a robust 46 percent, rising to very high levels if the diamond grade improves with depth as forecast in the geological model.”

About 400,000 tonnes of kimberlite is scheduled to be mined from stoping development in the first 17 months of mine development to November 2012, when full-scale commercial production is expected to be reached.

The 30,000 tonne bulk sample currently underway at Lace will determine the initial mining grade and carat value at the top of the first mining block. Mining of the first block of kimberlite is set to be undertaken at a rate of 4,000 tonnes per day.

In May, the new decline at Lace successfully accessed kimberlite at the -260 metre bulk testing level. 

Since April last year, activities at Lace, which is located near Kroonstad 200 kilometres southwest of Johannesburg, have focused on completion of the 4.5 metres x 4.5 metres decline to access kimberlite resources below any areas stoped in the past.

At 10:39am today, DiamondCorp’s shares were up 3.6 percent at 13.6 pence each.

She reckons the rally in rough diamond prices is to pause after a strong run that has seen the price index run up to 195 from 157 (Panmure’s estimated figures). 

Consequently investors may need to look more closely at growth prospects of a company, rather than relying on the momentum generated by a buoyant market.

It is also important to point out that Turner is talking about a pause in an upward trend, not a slide in prices. So the fundamentals remain intact. 

“We forecast a small supply deficit in 2011 but with rough diamond prices having rallied hard in 2010 and risen by a further 6 to 8 percent this year, we think prices will remain around current levels for the remainder of 2011 and then rise by a modest 3 to 4 percent in 2012,” Turner said in a note to clients.

“Beyond 2012 we expect a growing supply deficit to support further real price increases.”

She added: “We believe investors in the sector now need to look beyond pricing for company-specific value drivers.”

Turner said Gem Diamonds (LON:GEMD) is Panmure’s preferred ‘sector play’ as she raised her recommendation on the stock from a ‘hold’ to a ‘buy’ with a 345 pence target. Petra Diamonds (LON:PDL) also rates a mention, though it is rated a ‘hold’ with a 185 pence target.

“We think Petra Diamonds may now tread water for a while and believe Gem Diamonds offers more near-term interest albeit we are cognisant of the operating risks,” she said. 

Turner adds: “Petra’s share price has risen by 166 percent in the past year and while we remain positive on the company’s ability to execute an ambitious growth profile, we believe this is now largely priced in.

“We are moving Gem Diamonds to Buy from Hold ahead of the company’s results on 15 March. Gem Diamonds share price has lagged the diamond sector and we believe there is room for a period of outperformance driven by progress on Letseng expansion and the development of Gope.”

Turner’s analysis has prompted us to take a closer look at some of the other hidden gems of the AIM market. Below are Proactive’s picks: 

Firestone Diamonds (LON:FDI): One of few junior-listed kimberlite producers in the world

Firestone recently became one of the world’s three junior-listed kimberlite producers. The company’s remarkable transition was due, in part, to its 2010 acquisition of Kopane Diamonds.

Last year the company brought its own BK11 mine into production, while at about the same time it brought Kopane’s much bigger Liqhobong mine into the fold. Liqhobong, which is in Lesotho, is worth an estimated US$2.7 billion based on the 91 million tonne resource which contains 31 million carats (average grade of 34 carats per hundred tonnes) 

At BK, Firestone plans to mine 11.5 million tonnes (Mt) of kimberlite at an average grade of 8.5 carats per hundred tonnes (cpht). Meanwhile it is accelerating plans to re-start and significantly expand production at Liqhobong’s main pipe, helped by a recent £13 million funding.  

Production is scheduled to get underway in the first quarter of 2011 followed by a sharp ramp up – capacity is expected to triple to 1.3 million tonnes per annum by the end of the fourth quarter.

Initial mine planning and pit optimisation studies on Liqhobong indicate that open pit mining operations can be undertaken to a depth of 390 metres and would result in the mining of approximately 60 million tonnes of kimberlite and 19 million carats over a period of approximately 17 years.  No waste stripping will be required for the first 9 million tonnes.

Firestone is also the largest holder of mineral rights in Botswana's diamondiferous kimberlite fields, controlling approximately 10,000 square kilometres around the major Orapa and Jwaneng mines and the entire Tsabong kimberlite field.  In addition to Liqhobong and BK11, Firestone has 108 kimberlites in its portfolio, of which 30 have been proven to be diamondiferous.

DiamondCorp (LON:DCP): Going deeper underground at the Lace Mine in South Africa

At present DiamondCorp’s priorities are firmly fixed on an ambitious plan for the Lace diamond mine in South Africa, although it is also keeping a few exploration projects warm on the back-burner.

Last year the group accelerated plans to take the historic Lace mine deeper underground.

Recent newsflow revealed that the major underground development project is on track and on budget, while last month’s auction of Lace tailings’ diamond points to ‘better-than-expected’ economics for the mine.

In February DiamondCorp sold 1,321 carats of tailings diamonds for US$94 a carat. The auction reflects the improved conditions in the diamond market – similar batches have previously fetched US$55 a carat received in September 2008 and US$33 a carat at the bottom of the market in May 2009.

Crucially it implies that the main pipe diamonds, that will be produced once the underground mine is up and running, will be worth much more than the US$120 per carat ‘base case’ value envisaged when it first began the project. 

A rough industry rule-of-thumb values kimberlite diamonds at around 1.5 - 2 times more than tailings diamonds.

A parcel of kimberlite 'pipe diamonds' will be tendered in the June quarter of 2011. At the moment DiamondCorp is working to assess the top level of an estimated 33 million tonnes of kimberlite that remain below Lace’s old working areas.

It is scheduled to access the main kimberlite pipe at the sub-260 metre level in March. From here it will conduct an initial 30,000 tonne bulk sample of kimberlite.

Fairfax Securities mining analyst Marc Elliot claimed the Lace mine could turn out to be a ‘company maker’ for DiamondCorp, or it could even become a welcome asset to a mid-tier producer.

Aside from the Lace mine, DiamondCorp is actively exploring two diamondiferous kimberlite pipes in Botswana. It is currently preparing a drill programme at the J-05 pipe – where it found 2 macro-diamonds and 49 micro-diamonds in last year’s drilling.

Stellar Diamonds (LON:STEL): Unlocking potentially high-value kimberlites in Sierra Leone and Guinea

Stellar is currently exploring two highly prospective kimberlites with renewed vigour, after a recent review found that its two producing alluvial diamond mines in Guinea are not performing as well as hoped. 

The two mines still provide useful cash-flow but Stellar are really looking for the Tongo and Droujba kimberlites to sparkle as it steps up the pace of its exploration activities.

"Stellar is focused on unlocking the potential of its kimberlite portfolio, which includes some of the highest grade and highest value per ton of ore projects globally,” said Stellar chief executive Karl Smithson in last week’s interim results.

“We have recently reported excellent results from the company's kimberlite drilling and bulk sampling programmes and I look forward to building on this progress through 2011 which will position Stellar as a leading diamond company in Africa." 

A 3,000 metre drilling programme on the Droujba kimberlite in Guinea began last November. Stellar already knows that the pipe is larger than expected, while of the first 300 kilos of drill-core indicates Droujba is “potentially significantly diamondiferous”. 

Meanwhile at Tongo in Sierra Leone the plan for 2011 is to begin underground bulk sampling through shaft sinking and opening up development drives at 30m and 60m depth. This will enable the company to collect larger bulk samples, and in turn provide more information on diamond grade and value, as well as underground mining conditions.

Botswana Diamonds (LON:BOD): New company, proven management

This ‘new’ diamond kid on the block joined the AIM market in February. However the management team and the assets may already be familiar with investors in the diamond sector.

Botswana Diamonds is led by John Teeling, one of AIM’s best known deal makers. It comprises the exploration assets of African Diamonds which was sold to Lucara Diamond Corp in a share-based deal worth £51 million back in December. Lucara only had eyes for African Diamond’s AK6 diamond mine and the remaining exploration assets were spun out into the newly formed Botswana Diamonds.

With the successful discovery, development and sale of the AK6 diamond mine now behind them Botswana Diamonds management team will now focus on the AK8, AK9 and BK5 kimberlites which are already known to contain diamonds.

On the ground the plan is to carry out an 11,000 tonne bulk sampling programme, which will focus on BK5, AK8 and AK9.

Most of the work will focus on BK5, where it will take a 9,000 tonne sample, while 1,000 tonnes will be taken from AK8 and AK9. Work is expected to start this month and the programme should take around 9 months to complete. 

The company expects that the bulk sampling should allow it to establish grades and the value per carat, which will in turn allow it to evaluate the economic viability of the kimberlites.

"While this is the first major project for Botswana Diamonds, we have been working on these Orapa kimberlites for some eight years,” Teeling said last month. 

“In recent months, we undertook a study to identify the minimum cash value per ton of ore necessary to sustain viable operations ranging from a quarrying and trucking project to a stand-alone mine. This work will help to establish the potential revenue per ton by improving our grade estimates and by giving us sufficient diamonds to establish a reasonably accurate value per carat.”

The first bulk sampling results are expected by June 2011.

Sunrise Resources (LON:SRES): An early stage explorer with diamond pedigree

While much of its valuation and investor interest centres on the Long Lake gold project in Canada, this small exploration company’s roots are in the diamond sector.

It was founded back in 2005 to acquire Tertiary Minerals’ (LON:TYM) diamond exploration assets in Finland. Since then it has amassed a portfolio of early stage, multi-commodity assets.

However last month signalled a renewed emphasis on diamond exploration, when Sunrise was granted an initial 5 year exploration licence over the 70 square kilometre area on the Yilgarn Craton, Western Australia. The area is referred to as the Cue diamond project. 

The Cue project, which was explored by De Beers between 1994 and 2001, has lingered in the background for sometime while Sunrise waited for the licence.

Northland Capital’s head of research David Johnson said: “the historic De Beers programme makes this more brownfield than greenfield exploration.” 

“(Cue) now comes into the reckoning as an area of diversification to add to the encouraging start to Long Lake Gold attributable for the majority of the company’s market valuation and the emerging Derryginagh barite project.” 

In many ways the Cue project is coming to the fore at an opportune time. Indeed Johnson is forecasting a re-emergence of the diamond sector. He highlights the market is currently buoyed by ‘positive noises’ on diamond prices - that are typically determined by private auctions or valuations - among companies operating in the sector.

Sunrise is now preparing the first drill programme which will get underway in the second quarter of 2011, subject to the completion of the heritage surveys and drill rig availability. 

The first drill programme will aim to sample known kimberlites, so that Sunrise can evaluate the diamond content and characteristics. Sunrise will also drill some un-tested kimberlite targets at Cue - named Fennels Well and Soapy Well.

Gemfields (LON:GEM): Green with envy? An emerald producer in midst of a purple patch 

With a slight break from the theme, emerald and beryl producer Gemfields is also a notable player in this corner of the AIM market. The gemstone group, which owns the Kagem mine in Zambia, has hit something of a purple patch of late as the company has served investors with sparkling financial results. 

The shares have risen four fold since September 2010, climbing from as low as 3.6 pence to its current level over 16.5 pence a share. 

Earlier this week Gemfields unveiled another ‘excellent set of figures, as its interims showed a +£20 million swing into profit with a US$15.5 million profit compared with a loss of US$5.8 million a year earlier. In the six month period the Kagem mine’s production eclipsed that of the whole of the preceding year.

In the results chief executive Ian Harebottle said: “we are seeing a significant increase in global demand for Gemfields' ability to provide a consistent supply of well graded and ethically sourced emeralds, as is clearly demonstrated by the record sales of USD 19.6 million achieved at the December 2010 auction.”

Conclusion 

The market for rough diamonds may have paused for breath, but as you have seen the miners we’ve uncovered certainly have no intention of doing so. The question is, however, whether our companies can transform all the hard work and heavy capital expenditure into sparkling returns for investors.