Stellar Diamonds pleases analysts with Tongo update

Stellar Diamonds (LON:STEL), the diamond miner focused on West Africa, pleased analysts after it announced  today it has begun resource drilling at its high-grade Tongo kimberlite diamond project in eastern Sierra Leone.

The company says in a statement that it expects the 6,000 metre diamond core drilling programme will help define a maiden inferred resource estimate to at least 200m below surface.

Bulk sampling has already yielded 926 carats for an undiluted grade of 115 carats per hundred tonnes (cpht), with potential in-situ kimberlite value estimated at up to $220 per tonne.

Stellar’s chief executive Karl Smithson says that with the recent appointment of CAE Mining as mining consultant, and now the commencement of drilling, the company remains on track to establish a maiden resource for the Tongo Dyke project in the first quarter of 2012.

Smithson adds that the Tongo bulk sampling grades “continue to prove encouraging”, with the kimberlite yielding an average grade to date of 115cpht. A further diamond parcel of approximately 300 carats will be exported in the near future to combine with the parcel of 639cts already in Antwerp which was recently valued at $191 per carat.

The company recently signed up E-Global Drilling to undertake the 6,000m core drilling at Tongo, with an option to extend the meterage if necessary. This first phase of drilling will be focussed on the 2.5km strike length of Tongo Dyke 1 in order to establish lateral and depth continuity of the kimberlite ore body at every 100m along strike.

Holes are being planned to intersect the kimberlite at depths of 50m, 100m and 200m from surface, with some holes targeting intersections at 300m vertical depth.

In addition, the 1km long Tongo Dyke 4, located 1km to the north of Dyke 1 will also be drilled as part of the programme. Previous mini-bulk sampling of Dyke 4 undertaken by Stellar returned grades of 100cpht.

CAE Mining are overseeing the resource drilling and bulk sampling programmes as part of their mandate to independently establish a maiden inferred resource estimate for the Tongo project.

In all, Stellar owns a 100% interest in four high-grade kimberlite projects in Guinea and Sierra Leone.

In Guinea resource definition drilling is continuing on the diamondiferous Droujba kimberlite pipe and a processing plant is being established on site to process bulk samples.

Smithson says: “We remain confident about the potential the Tongo kimberlite project offers and we look forward to updating the market on the progress we make as we work to establish a maiden resource base at both our Tongo and Droujba projects."

Northland analyst Andrew McGeary hailed the “encouraging consistency in the Tongo programme”, adding that diamond quality from the project “remains high”.

McGeary says the good newsflow on Tongo grades continues to support project development, although the resulting, positive implications for the company are not being reflected by the shareprice, which has experienced significant weakness recently. 

The recent appointment of consultant CAE Mining to oversee resource drilling and bulk sampling programmes to independently establish a maiden inferred resource statement estimate for Tongo presents “a major future catalyst”, says the analyst. 

Ahead of that statement, McGeary expects a scoping study to be produced, for at least the management’s consumption, which should enhance confidence in the project. 

He notes that Droujba in Guinea is also progressing to resource stage and represents “a potentially easier open-pit drilling target”. 

McGeary, who rates Stellar shares a ‘buy’, adds: “Whilst the weak share price reflects a difficult market for small cap miners we continue to see substantial value potential in the company’s operations, with potentially two marque projects in Tongo and Droujba moving towards JORC status in the first quarter of 2012, and with significant confidence to be gained from on-going exploration.” 

Over at housebroker Daniel Stewart, meanwhile, analyst Shamim Mansoor also presented an upbeat assessment of Stellar’s prospects.  The company’s statement today, she says, indicates “all systems are go” with the Tongo project and augurs well for the group’s prospects.

Daniel Stewart rates the shares a ‘buy’ with a target price of 15 pence, which is nearly 150% above the current price of the stock. 

The broker sees “little downside, given that rough diamond prices are still rising and that all four [of the company’s key] exploration projects appear to have robust economics”.

Daniel also points out that with £5m in the bank, Stellar Diamonds is now a well funded company. Its cash position “has removed a substantial risk to the business and enabled it to accelerate its work programmes,” it says.

Among the company’s key projects, Daniel Stewart is particularly positive on the Kono asset, also in Sierra Leone, as it has potential to generate “substantial near term value” as it would be cheap and quick to restart production at the mine. 

The Kono properties are situated within the renowned Koidu diamond mining district in eastern Sierra Leone. Stellar commenced exploration on the 200 square kilometre licence areas in 2002 and discovered a number of high-grade diamondiferous kimberlite dykes. 

Petra Diamonds (LON:PDL) was brought in as joint venture partners to Stellar in 2005 and oversaw an underground trial mining exercise. During this period some 4,200 carats of diamonds were produced at grades of around 65cpht from the Pol-K and Bardu shafts.

As part of Stellar's strategy of positioning for future production growth, it took the decision to purchase the 51% equity held by Petra Diamonds. This was completed in April-10 by awarding Petra 4,500,000 shares in Stellar at a price of 20 pence per share, valuing the acquisition at £900,000.

The Kono trial mine was placed on care and maintenance in May 2009 as a result of the financial crisis and crash in diamond prices. Stellar has recently been considering options to resume the trial mining.

Petra Diamonds also issued some positive corporate news today, noting it has moved closer to completing its acquisition of the Finsch diamond mine from De Beers, with the deal granted ministerial consent from the South African government.

The company has now been cleared to transfer the Finsch mine’s new order mining right from De Beers Consolidated Mines Ltd to Afropean Diamonds Ltd – which is 74 per cent owned by Petra. 

In January Petra agreed the US$210 million deal to buy the mine, which is South Africa’s second largest diamond mine by production.

"We are delighted to have received the Section 11 Ministerial consent,” said chief executive Johan Dippenaar.  “The acquisition process is now in the very final stages and we expect it to complete in the near future.  

“Petra will then take over management of this major producing diamond mine which, after an initial three month bedding down period, is expected to add approximately 125,000 carats per month to Petra's production."

Yuen Low, analyst at City firm Shore Capital, reckons the granting of ministerial consent all but completes the deal. “All that remains is for the registration of the transfer; Petra intends to publish a Finsch resource statement when this has been completed,” Low said in a note to clients.

“Whilst today’s news represents the completion of a major hurdle, we believe it is already in the share price and consequently do not expect a significant impact."