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Firestone Diamonds just months away from production at Liqhobong

Firestone Diamonds is racing towards first production from the Liqhobong mine in Lesotho
Firestone Diamonds just months away from production at Liqhobong
Construction is nearing completion at Firestone's diamond mine in Lesotho

Shares in Firestone Diamonds PLC (LON:FDI) have staged a remarkable rally over the past few weeks, rising from lows of around 17p in mid-February to around 27p now.

That’s a cool 50% increase in a sector that’s been widely written off as moribund.

So what’s behind this rise?

To be sure, there’s been a modest improvement in diamond prices during the first part of this quarter, which helps. And to be sure, some investors now appear to be returning to mining after adventures in biotech and elsewhere, and volumes in Firestone appear now to be picking up.

But the real reason behind the rise can be found on the ground in Lesotho, where Firestone is well into the process of constructing its Liqhobong diamond mine, or failing that, on the company's website, where new images of steady progress towards first cashflow in December can be viewed almost daily.

It wasn’t always like this though.

Back in June of 2015 the company was forced to announce a six month delay to first production, as heavy rainfall hampered development severely. That news began a slow share price decline that has only really been reversed in the past few months, as investors eventually appreciated that the delays would be unlikely to precipitate additional fundraisings and cash calls.

Because, aided by a favourable currency movement, Firestone has regrouped effectively and is now racing towards producing its first diamonds by the end of the year, back on track with  a revised schedule.

“We’ll be commissioning the plant in October,” says Brown. “When we last formally updated the market in February we were 68% complete.”

Since then, there’s been further progress, as any glance at the company’s website will tell you, and even within that 68% completion statistic there’s room for upward revision, as certain major components have been assembled, but don’t count as being “complete” until they are fully installed.

“The crushers are working,” says Brown. “The conveyor works. We will be ready to mine in very small amounts in October and December.”

Initially, production will run from 40 tonnes up to around 1,000 tonnes per month, but as next year gets underway the plan is then to increase that to around 300,000 tonnes per month over a period of six months or so.

Why is Brown so confident?

Partly because he’s an experienced diamond miner himself - for many years he held a key role at De Beers; but mainly because the team that’s building Liqhobong already has experience of mine building in Botswana and knows what the pitfalls are and where the shortcuts are.

Potential issues with water have now been addressed, and the company has over 600,000 cubic metres stored on site, more than enough for a year’s operation.

“Overall,” says Brown, “we’ve de-risked the project. We think we’ve got the right people building it.”

He’s also rendered more secure in his planning by the financial buffer Firestone currently enjoys. The plan is that by the time first cash flow comes in, there’ll still be a US$10 mln cushion left in the bank.

Behind that stands a US$15 mln banking facility and behind that, although slightly more speculatively, stands an additional US$8 mln due from the now delayed sale of the BK11 kimberlite pipe in Botswana to Tango Mining.

All in all though, it’s enough to satisfy investors and analysts alike.    

“According to our numbers,” writes Mirabaud, “Available funding for the project (excluding the US$15m cost overrun facility) will see the project though commissioning and ramp-up, providing sufficient working capital for a significant period of production (around three months) before the first diamond sales are made.”

“We’re fully funded until December,” confirms Brown.

So does this mean that Firestone is conforming to the classic model of a company that re-rates in the run up to production?

At this stage it looks like it. The theory behind that model is that the more de-risking that gets done, the more value there ought to be in the equity.

We’ve only got a couple of financial quarters to go now to find out if it’s true.

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