By Lawrence Williams, Mineweb.com
AIM listed diamond miner, Firestone Diamonds (EPIC: FDI) looks to be in an excellent position, with its first kimberlite diamond mine due to come on stream as the diamond market - in particular for rough stones - looks to be moving back up again quite sharply.
On a visit to the site of the project, close to De Beers' massive Orapa diamond mine in Botswana, the company's chief executive, Philip Kenny, and chief operating officer, Tim Wilkes explained to Mineweb the economics of mining the BK11 pipe , where the first phase of the process plant is due to come into production in the second quarter of this year, with Phase 2 following perhaps in the third quarter, and a third phase expansion possibly to follow shortly thereafter. This means the company should be able to start generating cashflow from its Botswana operations in the third quarter of the year.
What is special about BK11? Quite apart from being located in Botswana - the one African country which ranks among the top tier of countries in which to invest in the mining sector, the deposit is in flat lying land, close to good existing roads and power, and the top 120m thickness of the kimberlite pipe is very soft and friable - some can be broken by hand - which makes liberation of the diamonds without incurring damage easy, and low cost in power terms. The percentage of the far higher value gem quality stones found from bulk sampling too, including from a 50 m deep trial open pit, is exceptionally high for a kimberlite pipe at close on 90%. Indeed the value per carat claimed by the company for the product is at around US$137 per carat - very high for a kimberlite pipe.
The company is also able to pick up, and utilise, top quality used equipment, some of it from other diamond miners who have shut down in the light of the big plunge in diamond prices seen from mid-2008 until the big turnaround early this year, and hence keep costs to a minimum. Most of the main plant has come from the company's own Bonte Koe alluvial diamond treatment project in South Africa, which has been closed. The plant has been dismantled, and has been/is being completely refurbished so it arrives on site looking like new. The first 50 t/h capacity modular DMS unit is already on site, and this will be followed by other sections as the refurbishment in South Africa continues. Phase 2 which is due to come in in the third quarter will include the installation of a second, higher capacity DMS unit rated at 75 t/h. A possible third phase, involving another 75 t/h DMS plant could be brought in by the end of the year.
What perhaps makes the deposit even more attractive is that the kimberlitic material becomes coarser with depth, and this applies to the diamonds too, so bigger (and higher value) stones are anticipated as the eventual pit gets deeper. This gradation continues down to around 150m depth after which a harder pipe core may contain lower values, and consequently be more expensive to process. The top 150m will, however, take around nine years to work out by which time BK11 should have paid for itself many times over and will have enabled the company to expand its operations into some of the other kimberlite pipes over which it has licenses.
As to the other kimberlites, several of Firestone's other assets are known to contain diamonds - far from a foregone conclusion with kimberlite pipes. In the Orapa area alone, Firestone has control over 21 kimberlite pipes of which 14 are known to contain diamonds and the idea is to use the BK11 plant as a base for satellite mining operations. Among these are five high priority targets - BK16, AK11, BK14, BK23 and AK24. Of these BK16 is of particular interest. This was sampled by De Beers in the 1990s and is known to contain high value diamonds similar to those at BK11 - and the resource potential is bigger.
Firestone has also concluded an agreement with Tawana Resources whereby it can earn up to an 85% interest in another eight kimberlites in the Orapa area, all of which offer some potential - most particularly BK24.
But, Firestone also has substantial interests in the Tsabong kimberlite field right in the south of Botswana, which includes the massive MK1 kimberlite which is bigger in area than De Beers very big Orapa and Jwaneng pipes put together and where Firestone reckons the prospects for economic discovery are good. If this were to proceed Firestone would almost certainly need a jv partner to mine a kimberlite of this size.
However the BK11 mine and the numerous diamond exploration prospects are not the only potential revenue stream for Firestone in Botswana. It is entering an agreement with De Beers to treat De Beers' Jwaneng mine coarse tailings dump which contains over 30 million tonnes of material with recoverable diamonds. But this is to be treated on a strict toll contract basis with De Beers selling the diamonds produced. Firestone has already undertaken a successful toll treatment contract for De Beers in South Africa, but this became uneconomic with the fall in diamond prices and De Beers called a halt leaving Firestone with a working diamond plant - the one which is now being redeployed at BK11 - and compensation of some $4 million. Firestone reckons the Jwaneng contract could be worth up to $150 million over time and represents a long term and predictable revenue stream. As the treatment basis would be on a cost per tonne treated basis there is no direct exposure to the vagaries of the diamond price, either positive or negative - although the risk would be that De Beers could pull the plug on the operation if diamond prices fell back like they did in 2008. But presumably there would be a compensation clause built into the contract should this occur.
Should the Jwaneng talings treatment work prove successful then there is the possibility similar tailings treatment schemes could be rolled out across all De Beers' Botswana operations with Firestone in poll position to win these contracts too. The potential is enormous.
Although Firestone has a particularly good project in BK11 which promises to be highly profitable, plus the potential from its exploration segment and the revenue from tailings treatment, it is ultimately the price of rough diamonds which will define the company's profitability. Both Kenny and Wilkes express great confidence in rough diamond prices going forward with the projections that global diamond production is falling and that as the world pulls out of recession markets will continue to pick up as they have done in the second half of 2009. This may not be a foregone conclusion of course as there still seem to be problems ahead, particularly in the western economies which could lead to slower progress than projected in the markets.
Nevertheless Firestone does seem better placed than most junior diamond miners and is keeping its costs well under control. Analysts following the company reckon that it is undervalued - and certainly if the diamond market continues its recovery Firestone seems particularly well placed - even without taking its huge exploration potential into account.