DiamondCorp cash call sensible as it assesses funding options for Lace, say City analysts

Analysts this morning applauded DiamondCorp’s (LON:DCP) decision to raise just over £2 million from investors – a move which will allow it to concentrate on pulling in the project finance required to develop the Lace Mine in South Africa. 

The proceeds from today’s share placing will be used to pay off debt and accrued interest owed to Africa Opportunity Fund, and will boost working capital.

“The company’s mine plan and its projected cash flows should attract project financing given the values and production achievable using a block mining plan which requires relatively low initial capex,” said John Meyer of City firm Fairfax in a note to clients.

DCP is issuing 31.6 million shares, around 13 per cent of its enlarged share capital, at a price of 6.5p each. The placing price represents an 8.77 per cent discount to yesterday’s closing share price. 

"I am delighted that with the support of our shareholders, DiamondCorp will now be completely debt free,” said chief executive Paul Loudon.

“This fundamental strengthening of our balance sheet comes at the same time as we have demonstrated that our flagship asset, the Lace mine in South Africa, will support a 25-year mine life, producing almost 450,000 carats per annum at peak production and generating life-of-mine cashflows of almost £500 million.”

Earlier this month DiamondCorp published revised development plans to by-pass the mine’s historical working and instead aim straight for the lower lying, higher grade kimberlite. 

This new plan has a capital cost of £11.4 million. The company now plans to secure project finance, rather than raise additional equity, to cover these costs.

Explaining the decision to seek project financing to complete the Lace development, Loudon added: "Markets for resource stocks are experiencing a difficult period at the moment, and financing the whole of the Lace mine development from equity capital cannot be done without an unacceptably high dilution to existing shareholders.

“Therefore management will now turn its attention to investigating sources of project finance for Lace in a form which provides the least dilution and maximum leverage for existing shareholders.”

Ocean Equities believes the move is a sensible one. “The company can now explore alternative funding options that will allow it to bring the mine into production in the short term,” said analyst Christopher Welch.

“The Africa Opportunity Fund debt had been secured against the Lace mine and plant and so removing this debt allows DiamondCorp to offer these assets as security for any alternative financing deal. 

“There still remains the option to raise equity at a later date when the share price recovers and we expect the announcement of positive drilling results from DiamondCorp’s Jwaneng South project would produce a significant uplift in the company’s share price.”

Ocean’s Welch estimates the net present value of the Lace Mine to be £100 million, based on a US$150 a carat diamond price. This compares with the company’s current market capitalisation of barely a tenth of that figure.

Separately DCP chief Loudon revealed in today’s update said that drilling is underway in Botswana at the group’s exciting diamondiferous kimberlites near De Beers' massive Jwaneng mine – the richest diamond mine in the world – and an initial grade indication is expected before the end of this year.

By 1.50pm DiamondCorp shares were down 0.85 pence to 6.27 pence, reflecting the potential dilutionary effect of the cash call.