Analysts and investors welcomed DiamondCorp’s (LON:DCP, JSE:DMC) update on the Lace mine’s underground development with open arms this morning.
The stock advanced more than 8 percent in early deals and London’s top mining analyst gave the junior diamond group some resoundingly upbeat write-ups.
This morning DiamondCorp told investors that the Lace mine’s decline development is on track and on budget, overcoming the challenges of the recent strong rainfall in South Africa’s Free State province.
DiamondCorp chief executive Paul Loudon said: “We are now weeks away from accessing the top level of the estimated 33 million tonnes of kimberlite remaining below any of the old working areas at Lace.”
Additionally it has successfully re-commissioned a 1.2 million tonnes per annum dense media separation plant at the mine, by feeding it from tailings. Processing the tailing will help prepare the plant in readiness for the fresh kimberlite.
DiamondCorp will sell these ‘tailings diamonds’, to alleviate some of the project financing burden. A parcel containing 1,328 carats will be tendered in Johannesburg later this month to determine the market value of the Lace tailings diamonds.
Crucially, the underground mine development project is now on schedule to access the main kimberlite pipe at the sub-260 metre level in March.
In a note to clients Marc Elliot, mining analyst at Fairfax Securities, claims the Lace mine could turn out to be a ‘company maker’ for DiamondCorp, or it could even become a welcome asset to a mid-tier producer.
Elliot emphasised that the new decline will allow DiamondCorp to start taking bulk samples from the kimberlite.
The sampling will help it finalise the Lace mine’s grade and carat value. Elliot reckons this will be the company’s most important milestone to date.
The analyst's estimated production profile sees a 30 year operation at the lace mine, with production starting at around 230,000 carats a year, before rising to 410,000 carats a year a in 2016 – when he expects grades to rise from 24.4 carats per hundred tonnes (cpht) to 43.5cpht.
“We feel that there is potential that grades exceed these levels, particularly in the early years.
Elliot adds: “Lace remains a low cost proposal from both capital and operational perspectives, with a long potential mine life that would be a company maker allowing other developments, or a welcome asset to a mid-tier producer.
“Lace is fully permitted, has a proven (and now re-commissioned) processing plant and with recent progress and financing is considerably de-risked.”
The analyst assumes the mine will have operating margins of about 50 percent through the initial years, rising to 73 percent as grade improves (estimating cash costs of US$67 a carat, falling to US$38 a carat).
He reckons the mine will development cost (Capex) around US$16 million this year. Some of this is expected to be sourced from diamond sales, from development ore, and an equity-based financing will be carried out to complete the mine.
In light of the group’s progress, Elliot has upgraded his target price from 17 to 19 pence - which implies more than 40 percent upside to the current price, 13.25 pence per share.
Furthermore the analyst is optimistic about long term diamond prices and he reckons the South African Rand is unsustainably strong and some relief should come through eventually.
Will Dymott, mining analyst at Cenkos, also highlighted the positive economics in the diamond market.
“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,” Dymott said in a note to clients.
The analyst rates DiamondCorp as a ‘buy’. He values the stock at 20 pence per share, based on the Lace mine alone.
“Diamondcorp will have an operational plant, a decline completed to the production levels, and a capital requirement to repay £2.5 million of debt and complete the final development of a 25 year diamond mine,” Dymott said.
He adds: “We maintain a buy on DiamondCorp, assuming a further raise for production and so including dilution we value Lace at £36.9 million or 20 pence per share with upside dependent on the bulk sample results.”
Andrew McGeary, mining analyst at Northland Capital, told clients that Diamond Corp remains an interesting opportunity, particularly given his bullish stance on the diamond market.
He emphasised that the update shows good progress in challenging circumstances.
“The lace mine has been mothballed for some time and while the March timescale and £5m budget for the decline is somewhat dependent on better behaviour from the weather, performance to date is encouraging,” McGeary said.
“The positive aspect of the decline is that the company can effectively process ore as it goes ahead with the development of the main shaft and full scale production, somewhat easing the capex burden.
“Information of recovered grade and carat value via the processing of 30,000 tonnes of ore before Q2, suggests significant upcoming catalysts.”
McGeary also notes that Jwaneng adds exploration potential to the DiamondCorp story.
Elsewhere Ocean Equities analyst Chris Welch said that the bulk sampling programme will lead to a significant re-rating for the stock, when he reckons DiamondCorp will unearth higher value stones from the fresh kimberlite.
“The management team is doing a great job in the complicated task of re-commissioning an old mine, albeit an old mine with many significant advantages. We expect that the development deadline will be met,”
“The next catalyst for DiamondCorp will be the tender of stones from the tailings processing. There are some large and high quality stones being tendered in a more buoyant diamond market.”