Stellar Diamonds enters a pivotal period of development; but is the market missing a trick?

Stellar Diamonds’ (LON:STEL) £6.2 million cash call three months ago was a turning point for the company but one the market appears to have to have missed.

The placing at 8 pence a share brought in a new cornerstone investor in Blackrock, and signalled the start of a very exciting phase of development for the group.

Focused drilling programmes on its main Kimberlite projects – Droujba in Guinea and Tongo in Sierra Leone – should result in resource statements next year that could transform Stellar.

Not that this has been reflected in the share price, which has drifted down to 6 pence on little or no newsflow.

It has succumbed, along with scores of other companies with good news stories, to a rather fidgety nervousness that has gripped investors in small-caps stocks.

If he is frustrated by the market’s reaction of late, chief executive Karl Smithson doesn’t show it. 

“We have our heads down and are working very hard,” he told Proactive Investors. 

And in truth Smithson and his team have a lot more to occupy them currently than the direction of the share price.

“We are working on two resource statements this year. That should change the game altogether for us,” he adds.

“Meanwhile the fundamentals for the rough diamond market are strong, though the market has taken a little breather.” 

He is right the outlook is encouraging. Demand from the rapidly growing middle and upper classes of China and India will underpin prices, while the economic recovery of the US, still the main consumer of the gemstones, will maintain that upward pressure.  

The tone coming out of the recent Mining Journal Diamond Conference in London was “reasonably upbeat”, according to David Johnson of City broker Northland.  And the analyst said pricing remains “reasonably robust”.

So it is good time to be developing a diamond mine – even better if you have two fairly meaty projects.

Droujba is the bigger of the two main Stellar prospects. Discovered in the 1960s by the Russians, it was mined down to 20 metres,and it was believed there was nothing below that depth.However this has been thoroughly disproved by the Stellar drilling programme, which has intercepted the kimberlite pipe at 222 metres and it is still open at depth. 

So having completed an initial 18 holes for 3,000 metres, phase two will see the team go down to 250 metres. 

Tongo, meanwhile, is small but perfectly formed. It is in a renowned diamond mining area of Sierra a Leone, and in all four kimberlites have been discovered and tested.

“In carat terms it is not the largest mine in the world,” Smithson concedes. 

“The scale is modest, but the grade and diamond value it could make it very, very attractive.  

“The capex for this small mine might only be US$25 million for production out of Tongo of 200,000 carats a year.

“But when you are dealing with (diamond prices) of $200 a carat that’s a lot of money. 

“Droujba is slightly bigger affair, but still very affordable and cost effective when compared with other projects.”

Next year Stellar will deploy a 17 inch drill to confirm diamond grades at depth as part of the next phase of the exploration and drilling programme in Guinea, but not before it has an inferred resource and has completed an initial economic scoping study.

At Tongo, meanwhile a 2,000 tonne bulk sampling programme is already well underway. So far 650 carats have been exported to Antwerp for valuation and sale.

Bulk sampling continues at Bouro, in Guinea, and Kono, in Sierra Leone. 

And to date 125,000 carats have been produced from Bomboko and Mandala alluvial diamond deposits in Guinea. 

While Bomboko has been closed down because the grades are uneconomic, Mandala appears to have turned a corner.

“It has been through a tough time. We had access issues, but we are now in the area we always want to be, and the quality has been good,” Smithson reveals. 

“We see it going for another 12 months at these levels. Mandala is running at profitability. We have not made any announcement about that, but we have turned a corner.”

The initial resource estimates for Tongo and Droujba ought to be a major turning point for Stellar.

At Droujba it is aiming initially for 5 million carats, Smithson says, which looks realistic given the work already done.

“We have only drilled the top 120 metres and are looking at 3 million tonnes sitting in the ground,” the chief executive points out.   

Droujba’s five million carats at $50 per carat gives an implied in-situ value of around US$250 million for this project alone, according to the company’s own internal analysis. 

Tongo is much smaller, with an estimated 1.12 million carats, though they are much better quality diamonds likely to command a price closer to US$170 a carat. 

Using Stellar’s methodology the Sierra Leone mine is worth US$189 million.  

In total, the group has assigned an in-situ value for the entire four-project portfolio of over U$800 million.

The City broker Northland makes a more cautious assessment of value. It has come up with an un-risked net present value for Stellar of US$119 million, or 34.7 pence a share. 

Its “risked” NPV is in the range of 9.6 pence to 13.8 pence a share, while broker Daniel Stewart has a 15 pence price target using the discounted cash flow valuation method.

“Having visited Stellar Diamond’s operations we are comforted that while significant logistical, operational and economic challenges remain, it is on course to deliver substantial value to shareholders,” said Northland analyst Andrew McGeary.

“Progress on the key Tongo and Droujba kimberlite projects is encouraging and there are some significant improvements from Mandala alluvial operations (conversely though, Bomboko operations have ceased). 

“All in all, we believe a potential initial resource for both key projects could provide a significant step change. 

“Nearer term, positive share momentum may be driven by news on grade and diamond value."