Cenkos Securities is bullish on DiamondCorp’s (LON:DCP) prospects for the current year and beyond, valuing the company's main asset at more than double its current market cap.
That estimate does not attribute any value to the company’s assets in Botswana, which Cenkos said was “one to watch” as the sampling programme continues.
The company owns 74 percent of the Lace diamond mine in South Africa, which is expected to be producing 430,000 carats per annum by 2015 and have a mine life of 20 years.
Due to a geotechnical concerns from the South African mines mininstry, the company is required to continue to the -260 metre level before taking a bulk sample with the extra 150 metre decline resulting in a 6 week delay.
Cenkos noted that while the cost implications are minimal, the timing impacts are significant, affecting the debt repayment schedule.
DiamondCorp has said that the decline is scheduled to access the kimberlite on the -260 metre level in March 2011.
DiamondCorp has recently undertaken a placing, raising £3 million to fund continued development and exploration.
“The plan was to raise capital on the back of bulk sample results but the delay means this will be too close to be possible. As such the increased development capital and debt repayment has now been raised, totalling £3 million including funds for Botswana bulk sampling,” said Cenkos.
Should the Lace bulk sample results be positive, DiamondCorp will have an operational plant, a decline completed to the production levels, and a capital requirement to repay £2.5m of debt and complete the final development of a 25 year diamond mine, said the report.
Cenkos now expects the company to raise £8.5 million in a follow-up exercise, which would be used to refurbish the vertical shaft and set up the full scale mining plan at Lace, continue exploration in Botswana as well as retiring the AOF debt.
The “buy” recommendation for the stock was maintained and Lace was valued at £36.9 million including dilution, or 20 pence per share with upside dependent on the bulk sample results.
Lace is projected to generate cash flows of £5 million from 2012 rising to approximately £16 million from 2015.
Assuming annual production of 230,000 carats from 2012 onwards rising to 400,000 by 2015 with a total 25 year mine life, Net Present Value (NPV) at a 13% discount rate is estimated at £37.7 million, after tax to DCP's 74%.
According to Cenkos’ estimates, this would result in an after tax NPV of £46.9 million with shareholder loan recovery to DiamondCorp.
This is significantly higher than DiaondCorp’s current market capitalisation of £22 million.
DiamondCorp now has two diamondiferous kimberlites in PL/71 Botswana for bulk testing in 2011, providing a pipeline of diamond exploration projects in Botswana in addition to a possible long-life Lace diamond mine development in South Africa.
The broker stated that reports have indicated that prices are increasing with improving sales and that even sales in the US will be better than expected with continued growth.
“The fundamentals of shortage of supply still exist and with continued recovery we expect the diamond market to continue to show a steady improvement in 2011 as DiamondCorp brings Lace into production,” said Cenkos.