African Diamonds’ AK6 poised to deliver the goods at last

The AK6 diamond mine in Botswana is at the early works stage of development and will come on stream late next year. When in full production, the mine - a 60/40 joint venture between Lucara Diamonds (TSX-V:LUC) of Canada and African Diamonds (AIM:AFD) – will produce over 1 million carats of high quality value diamonds, including Type IIa, each year.

AK6 – located in the Orapa kimberlite field some 25 kilometres south of the massive Orapa diamond mine - was discovered in the 1970s, but like many of the other small pipes prospected by De Beers, was considered unworthy of further attention at that time. But De Beers hung on to it, although they did lose control of several others to a small private company of geologists known as Kukama Exploration, who amassed a tidy portfolio of more than 20 small pipes and other exploration ground by applying for prospecting licences as soon as they became available.

Since inception in 2001, African Diamonds has been eyeing the potential of Botswana – which has the most prospective diamond ground in the world. A local company, Kukama, needed a partner to fund their activities and so a marriage was arranged with African Diamonds. Kukama brought three diamond exploration licences to the marriage

AFD listed on AIM in 2003, and exploration began in earnest. A further licence was acquired – a massive area to the north and east of the giant Orapa diamond Mine, giving African Diamonds a large ground holding. This, not unnaturally, began to attract attention and the result was the Boteti exploration and development JV with De Beers Exploration (as distinct from Debswana, operator of the Orapa and Letlhakane mines).  Each party was to contribute ground to the pot, with African Diamonds’ 21 kimberlites joining nine, including AK6. All exploration was funded by De Beers. Initially, the JV was 49-51% in favour of De Beers, with their share rising to 70% on completion of the first feasibility study.

AK6 was one of the first kimberlites to be bulk sampled by the new JV company. AK6 came up with particularly encouraging results from a 100 tonne sample, from which 165 macro diamonds were retrieved, totalling over 22 carats, with the largest stone weighing in at 1.32 carats. The modelled grade for the sample was 25 carats per hundred tonnes (cpht).  In December 2004, John Teeling – whilst issuing notes of caution about the small size of the sample – was delighted, and commented: “The sampling results from kimberlite pipe AK6 in Botswana, while very early stage, offer tantalising prospects.”

In the years since then, the prospects have become no less tantalising, as phase after phase of exploration work costing $35 million, and using diamond drilling, large diameter drilling, trenching and bulk sampling have firmed up the size and shape of the multi-lobed AK6 pipe. It’s now known that AK6 comprises three distinct lobes – North, South and Central – of which the South lobe, some 750m in depth, is far the greatest, containing some 72% of the resource tonnage in its top 400 metres at an average grade of 21 cpht. The North and Central lobes, are higher grade, at 26 cpht. It has also been discovered that the South lobe contains a relative abundance of the rare Type IIa diamonds, which contain virtually no nitrogen, and can – like the Cullinan and Koh-i-noor diamonds - be large and extremely valuable.

Overall, the latest indicated resource for the deposit – which excludes the potential of the Type IIa stones - is 11.3 million carats contained in 51.2 million tonnes at an average grade across all three lobes of 22 cpht, with a modelled value of US$194 per carat. This is the open cast potential. Additional inferred resources exist below the 400m level amounting to 20 million tonnes at a grade of 19 cpht and a carat value of US$183. 

It’s thought that these carat values may well be conservative, as due to the coarse nature of recovery and treatment during drilling and bulk sampling, significant breakages – particularly of Type IIa stones – were observed. Current mine processes and equipment have been designed specifically to avoid breakage of large stones. This could significantly enhance actual mined values.

In October 2007, with feasibility studies complete, an application for the mining licence for AK6 was put before the Government of Botswana, with the intent of commencing mining during 2009. It was at this point that the disadvantage of working with a large multi-national with established procedures and favouring sophisticated mining plans and processes became evident. De Beers were anxious to delay start-up beyond 2009, as they felt that the then market conditions did not support the economic case for AK6. Not unnaturally, African Diamonds disagreed with this approach, and actively opposed De Beers. With the support of the Botswana Government, who refused to countenance deferral, some legal sabre-rattling by African Diamonds resulted in De Beers’ objections being overcome, and a 15-year mining licence for AK6, involving no government equity share, was delivered in October 2008.

However, by then, the market for diamonds had collapsed. Whilst the Boteti participants had every confidence in an eventual recovery and return to normal, the lenders who held the purse strings were not so sanguine, and the US$260 million funding for AK6 proved difficult to secure. This led African Diamonds to commission a new study for the development of AK6, using an outsourcing/contract mining model, under which initial capex could be reduced to US$63 million. This will establish a mine with a 2.5-3 million tonnes a year output, to generate more than 400,000 carats pa at a modelled grade of 22 cpht. A further US$25 million in capital expenditure will double the output of tonnes and carats. Actual mined grade is expected to be at least 25 cpht, giving an eventual output of over 1 million carats pa over a 12 year open-pit mine-life, with further potential remaining in the deeper sections of the South lobe. Mine development has started, with production in late 2011.

The final piece of the jigsaw fell into place last year. The long-term plans of De Beers, who had been an excellent partner for African Diamonds during the exploration and development phases of AK6, no longer gybed with those of their smaller partner, and in November 2009, they sold their 71% stake in AK6 to Toronto–listed Lucara, part of the Lundin Group. The deal provided the opportunity for African Diamonds to increase its stake in the venture from 28% to 40% for an outlay of £4.8 million. This, through a recent £9.6 million fundraising, they have now completed, as well as securing the funding for their initial contributions to mine construction works.

So, with the last obstacle out of the way and a larger slice of the rewards for African Diamonds, it’s all systems go for AK6.

It’s only fair to let John Teeling, whose faith in the value and viability of AK6 has never wavered, have the last word:

 “In Lucara, we have found a like-minded partner. The Lundin family, who control Lucara, have in two decades built a worldwide group of oil and mining companies.  Having John Gurney and Eira Thomas involved will provide expert guidance and credibility.

“For six years, we partnered with De Beers on AK6 and other projects in Botswana.  Together we found a diamond mine but, over time, the needs and aims of African Diamonds diverged from those of De Beers. It was a genuine pleasure and privilege to work with De Beers. An amicable separation is a good outcome.  The AK6 mine, with its high value diamonds, including the big, rare and beautiful Type II nitrogen- free stones, will come on stream at the right time.  The economics are compelling. Prices are rising, demand in the Far East is growing, while supply is at best flat. By 2012, there will be only a few kimberlite diamond mines in the world. “

AK6 - with its payload of at least US$2.2 billion - will, of course, be one of them…