Fairfax upbeat on DiamondCorp’s exploration potential in Botswana

In a note on DiamondCorp (LON:DCP, JSE:DMC) London-based stockbroker Fairfax said that the company’s exploration projects in Botswana “look increasingly interesting and hold the potential to be company transforming”.

Earlier today, DiamondCorp announced a massive increase to the size of the J-12 exploration target in Borswana from 15 hectares (ha) to 45ha, following the reprocessing of geophysical data from the PL71 Prospecting Licence, which covers the Jwaneng South project area. The company said that it has also better defined a 4ha target at J-05.

“It remains early stage but a 45ha kimberlite pipe is a very significant target and in terms of size is comparable to the major Jwaneng mine (54ha)”, Fairfax stated.

The two areas, J-12 & J-05, will both be tested in the upcoming six-hole drilling programme, due to commence in August, targeting diamondiferous kimberlites. After the August drilling program, the results will be combined with November’s results from drilling at the J-01, 10ha kimberlite. The combined data will determine the priorities for large diameter drilling and bulk testing across the PL71 license area.

“Previous drilling indicated that J-01 was close to surface and hopefully the other targets return kimberlite rock close to surface”.

The Fairfax note also emphasised the “considerable progress” being made at the Lace Diamond Mine in South Africa, after DiamondCorp revealed that it expects to reach the -240m level of the underground development by the year- end. “The management team is making significant progress with the progress at Lace and that they are indicating that the decline will be down to the required depth by the end of this year is a strong positive commitment and implies that they expect to be ahead of the original schedule.”

In this morning’s statement DiamondCorp highlighted that the development, to date, has been completed within budget, the decline size has been increased to 4.5m x 4.5m, and work is now progressing around-the-clock with a 24-hour three shift rotation.

The stockbroker sees a profile starting at 230,000 carats/year ramping up toward 420,000 carats/year out till 2038. Fairfax forecasts revenues of £18.4m per year between 2012-14, with net profits rising from a £2.1 loss in 2011 to £5.9m in 2012, and subsequently rising to £6m and £7m in 2013 and 2014 respectively.

Fairfax's valuation includes a 20% dilution factor in line with Snowdens's guidance, which it expects to be "overly conservative", and noted that the grades could prove conservative, too.  It has used diamond prices at US$120/carat - 30% above the last parcel sold - and cash costs of US$60/carat, falling back to below US$35/carat as grades improve.