Fairfax upbeat on DiamondCorp after positive interims

In a note to investors, Fairfax Securities focused on DiamondCorp’s (LON:DCP, JSE:DCM) positive interim results. The stockbroker said that whilst the company’s share price "remains at distressed levels", the broker believes that the Lace mine’s upside potential “should meet expectations” and successful bulk sampling “could see a major increase in valuation".

Fairfax said that DiamondCorp provides an “attractive investment proposition”, which is “well worth the risk”.  

This morning, DiamondCorp revealed that the underground development of the Lace Diamond mine, in South Africa, is ahead of schedule and within budget. Meanwhile, in Botswana the company’s ‘exciting’ kimberlite exploration programme is also progressing well with each of the first four holes intersecting kimberlite.

In South Africa, at the Lace mine, DiamondCorp is focused on the re-development of underground mining operations. At present it is developing a new sub-240 metre decline, which will facilitate the next phase of mining.

Importantly, Fairfax highlighted that once complete, the decline will enable bulk sampling from the kimberlite pipe, which will in turn finalise the grade and carat value of the mine.

The stockbroker believes that this bulk sampling may provide substantial impetus for investors.

“A successful bulk sample that meets previous indications 24.4cpht with 20% dilution as signed off by Snowden should see DiamondCorp's re-rate in a major way ... [it] would confirm the economic proposition for the asset which could be a long life highly cash generative asset producing 230,000-420,000carats/year.”

In reference to DiamondCorp’s other key project, the Jwaneng South exploration project in Botswana, Fairfax highlighted that the first four drill holes all intersected kimberlite at shallow depths, and the broker “looks forward to drill results in the months ahead”.

Fairfax also drew investors' attention to the heightened levels of interest in the broader diamond mining sector.

“Clearly, there are a number of market participants interested in the diamond market as the long term fundamentals remain robust with global production running out of reserves due to a lack of major new discoveries,” Fairfax stated.

“We note recent market interest in the sector, with Kopane merging with Firestone Diamonds, an unsolicited proposal received to acquire African Diamonds, the possibility of DeBeers Finsche Mine being sold to Transhex or Petra or another mid tier producer.” 

Fairfax said it valued DiamondCorp at 17p per share, based purely on a discounted NPV (net present value) estimate of the Lace mine, and considering a potential £6.5m fundraising in 2011.

“Although diamond exploration is high risk, the targets are in the right jurisdiction and an economic discovery could be company transforming”.