Diamondcorp: a big cash injection and a lot of work to do

As witnessed over the past 18 months, any company that relies almost entirely on the stock market to fund its activities is particularly vulnerable to a change in sentiment.  London’s Alternative Investment Market has watched hundreds of companies delist, and even today there are still dozens of companies which are unlikely to see it through 2010.

Yet there have been several success stories of late on AIM, particularly from a fundraising point of view. Oil and Gas juniors have been incredibly successful in raising money over the past 6-9 months, one of most recent being Xcite Energy (AIM:XEL) which is aiming to develop the Bentley heavy oil field in the North Sea.  Gold juniors have also benefitted from higher awareness and confidence in the gold price, plus a good dose of M&A activity in the sector.  A number of small pharmaceutical and biotech companies have also been back to the market in recent months, with success, and just this morning, Amphion Innovations (AIM:AMP) confirmed that one of its partner companies, Kromek, has raised £12 million – unimaginable just 12 months ago.

It is within this context of a market recovering that observers need to view news from Diamondcorp (AIM:DCP, JSE:DMC) that is has conditionally raised £7.1 million (£6.6 net) at 7 pence per share.  Looking at the chart of Diamondcorp since listing (February 2007), it is pretty clear that this junior diamond company has had its fair share of difficulties. Perhaps more pertinent however is the fact that Diamondcorp is still listed, and is now in a position to issue more than 100 million shares – double the current number outstanding – to move its Lace Diamond Mine in South Africa closer to production. Granted the placing was completed at a 26% discount, and the dilution is eye watering for current shareholders, but it is no mean feat raising more than double the current market capitalisation of your company. It is also worth noting that approximately 70% of the new money was raised from current shareholders, reflecting a hefty amount of faith in the management to deliver.

The £6.6 million boost to the balance sheet will be used for three primary purposes. First, £1.3 million will be used to meet interest and principle payments on a US$5 million loan facility the company has with Africa Opportunity Fund. The loan was initially secured when the company was developing Lace for production, which was suspended when rough diamond prices dived in the second half of 2008.

The bulk of the proceeds, some £4 million, will be used to complete a decline and sub-level caving required to extract a 30,000 tonne build sample at the -240 meter level.  It will take the company approximately 12 months to reach this level, and assuming the diamond grade of the bulk sample with within expectations, the company states that it will have to raise an additional £3.5 million to move into full scale production (1.2 million tonnes per annum).

The Lace main pipe contains 33.12 million tonnes of kimberlite in indicated and inferred resources to the -855 meter levels at an average grade of 40.12 carats per hundred tones (cpht), for a contained resource of 13.29 million carats of diamonds. All eyes will be on the valuation of the diamonds from the 30,000 tonne bulk sample in 2011. It is worth noting that Diamondcorp have repeatedly stated that the economics of the mine are very robust, and would have been feasible in 2008. The main issue in the past for the company has been securing adequate finance to complete development of the mine.

Diamondcorp has also earmarked £0.5 million for additional drilling at the Jwaneng South Project.  Individuals who frequently monitor the junior diamond sector will be more than familiar with the prospectivity of acreage in neighbouring Botswana.  So while Diamondcorp’s budget for the Jwaneng South Project is comparatively small, the threshold required to move a diamond bearing kimberlite into development in Botswana are comparatively lower than any other address in the world, hence the ‘blue sky’ potential of this project.  Previous drilling by Diamoncorp confirmed the presence of kimberlite in the first high priority target tested, J-01.
The remaining £1 million raised will be used for working capital.

So the race is back on at Lace for Diamondcorp.  There have been some massive potholes in the road to production, but today’s capital raising will go a long way in helping the company achieve its ambition.  The diamond sector as a whole has been ravaged over the past 18 months, but improving rough diamond demand and a rebound in prices has clearly helped improve sentiment towards the sector in the first quarter for 2010. As long as that continues, and Diamondcorp keeps to its development schedule, shares in the company could appreciate to reflect.