Firestone Diamonds cheers with Liqhobong diamond success

Firestone Diamonds (LON:FDI) shares rose after it announced it has recovered high quality diamonds from the K5 kimberlite unit at its Liqhobong mine in Lesotho. Broker Northland, for one, continues to see attractions in the unfolding Firestone story, noting the company is progressing towards key milestones that could make the current valuation for the stock “undemanding”.

In its statement this morning Firestone said the recoveries from a 3,000 tonne sample of K5 material included a 33 carat white diamond and a high quality 8 carat white diamond. Notably, the sample produced the mine’s first yellow and pink diamonds weighing 8 and 1.7 carats respectively.

Firestone saw the results as a confirmation that high quality diamonds are present at the main pipe at Liqhobong.

The company added that the test results bode well for the mining operations at K5 that are due to start in the second half of the year.

“We are very excited about the results of our first tests of the high grade K5 unit at the main pipe at Liqhobong,” said chief executive of Firestone Diamonds Tim Wilkes.

“The recovery of high quality diamonds, including our first fancy yellow and our first pink diamond, confirms that there is much upside to the value of the main pipe.”

The K5 unit is the highest grade of the four geological units in the Main Pipe, with an average resource grade of 45 carats per hundred tonnes (cpht). The K2 and K4 kimberlite units that have been mined to date in 2011 have an average grade of 28 cpht.

Firestone has hired Dowding Reynard and Associates to carry out the definitive feasibility study and engineering work for the second plant at Liqhobong.

This second plant is planned to have an annual processing capacity of 4.2 million tonnes, adding to the already operating first plant’s capacity of 400,000 tonnes per annum.

The company also announced today that it plans to hold its next diamond sale in Gaborone, Botswana in late August. It expects the sale to be significantly larger than the last tender in June, when it sold 14,248 carats for gross proceeds of about US$2 million.

Firestone provided an update from its BK11 mine in Botswana too today, reporting significant increases in diamond grades achieved at the production plant after a secondary crushing circuit was installed in the beginning of July.

The statement pleased Northland analyst Andrew McGeary, who believes the continuing good news from Liqhobong only adds to Firestone’s attractions.

McGeary anticipates a good outcome for the company’s next diamond sale in August. He notes that it June package for main pipe diamonds sold for $149/carat -  a 15 per cent increase on a sale in April 2011 and 52 per cent up on the result from December 2010 - at an improved grade of 34 cpht.

McGeary adds the presence of higher value stones revealed today bodes well for ongoing progress and grades, particularly given such a small sample, and especially as the company itself has signalled further upside.

Northland has previously noted hat if existing cost estimates for the project are accurate, there now appears to be “some leeway” for the economics of Liqhobong and today it reiterated that view.

The economic projection so far have indicated costs of $13-$15 against a production value of around $41/t, based on 32cpht and an assumed diamond price of $130/ct. For McGeary that looks to have “clearly been exceeded” now, with the latest results looking more like $50/t in production value.

The company is attributing the mine with a net present value of $277m, which McGeary thinks is relatively aggressive the given significant capex and execution risks. Still, he notes the valuation does highlight the potential on successful delivery on the project.

Kieron Hodgson at Charles Stanley also reponded favourably to the statement, reiterating his ‘add’ recommendation for Firestone with a target price of 37 pence.

Mid-afternoon, Firestone shares were up 0.75pence to 29.38pence.