If you have the time, or inclination, to read the many pages about diamonds on the website of the American Museum of Natural History you can learn a huge amount about the origins, geology, history and amazing physical and emotional properties of the king of gemstones.
If you don?t perhaps the key points, at least as far as understanding Diamondcorp?s business are concerned, are these:
1. Diamonds are formed from carbon that was crystallised at great pressure and heat billions of years ago in the earth?s mantle, some 150km below the surface. They, and other minerals, were transported to the earth?s surface in pipes of molten rock ? kimberlites - in a series of volcanic eruptions.
2. Although there are many kimberlites on the earth?s surface - some 7,000 have been found already - fewer than 1000 of these have any diamonds in them, and only a very small percentage have diamonds in economic quantities. Just 50 or so have become diamond mines.
3. While kimberlites are the primary source of diamonds there are also secondary deposits in rivers and on the beaches where diamonds have been eroded from the kimberlite pipes by water action.
Three billion years of history in one paragraph! But what of the future? The key point here is that there most industry players are expecting supply shortages. On the one hand demand is continuing to grow steadily, driven by demand from the ever-romantic US and the emerging markets, particularly India and China. On the other hand supply growth is very constrained. For more than a decade demand has been met only by running down the stockpiles that had been built up by the Russians and by industry giant, De Beers. These are now virtually depleted, most mine expansion plans have already been put in place in anticipation of the shortage, and the world?s diamond mines are now running at full capacity. Although some new production will come on stream much of it will be offset by declines from some of the mature mines.
Since (a) diamond exploration can be a hit and miss affair in the view of the difficulty in finding economic kimberlites, (b) new diamond mines, like those of other commodities, have a long lead time, and, (c) the supply squeeze is considered to be relatively imminent, the market is rewarding players with an expectation of near term production. Effectively this means that the market prefers companies with known viable kimberlites, companies with secondary deposits, or those which offer dump reprocessing (as both secondary deposits and dump reprocessing offer relatively low capital costs and a short lead time). Diamondcorp is one such company, offering both tailings retreatment from a historic mine to generate early cash flow, and a known kimberlite with a potential resource of 13 million carats.
The company was formed in March 2005 to acquire and develop diamond assets in South Africa. It raised £9.3m through private placements to acquire the mining rights to the Lace Property, which has an area of just under 12 square kilometres and is situated 200km south west of Johannesburg, and 20km from the town of Kroonstad (population 100,000).
Diamonds were first found on the Lace property in 1896. The kimberlite pipe was mined intermittently from 1902 until 1931 (when demand for diamonds evaporated in the worldwide depression - diamond production in South Africa fell from 2.2 million carats in 1930 to just 14,000 carats in 1933). Historic records show that in total over 4 million tonnes or ore were extracted from Lace both from a 100 metre-deep open pit and from partial underground mining to a depth of 240 metres. More than 700,000 carats were recovered at a grade of around 15 carats per hundred tonnes (cpht). However the mine was then considered to be fairly low grade and marginal. It was not reopened when the diamond market recovered from the depression, and was passed over again in a re-evaluation in the 1960s.
In 1997 exploration work recommenced, initially on behalf of a Canadian company who found positive results but were then unable to raise the necessary capital to buy the property in the wake of the Bre-X scandal. To cut a long story short, the work indicated that the grade previously achieved by the mine was low as the basic process was only 50-65% efficient compared with today?s methods and theft had probably been a major problem. Moreover the grade in the remaining pipe is higher than thought hitherto as hypabyssal kimberlite was discovered at depth, (this being kimberlite which solidified before ever reaching the surface), with a grade of up to 60 cpht.
Drilling work has now established that the kimberlite contains a potential resource of more than 13 million carats to a depth of at least 855 metres with the potential to support an underground mine for 20 years producing over 400,000 carats per annum.
Diamondcorp were further attracted to the Lace project by the potential for high margins. When comparing diamond projects the critical measure is not grade alone but revenue per tonne which is a combination of grade (carats per tonnes) and stone size distribution (dollars per carat). Estimates for the Lace project suggest that at current diamond prices revenue will be around $35/tonne compared with costs of $18/tonne in the upper levels of the mine, while in the deeper, higher grade, hypabyssal zones revenues could be over $70/tonne compared with costs of $24/tonne.
Diamondcorp therefore listed on AIM in February 2007 to raise £2.5m to further develop the project, specifically to:
(i) construct and commission a new diamond recovery plant to retreat the 3.6 million tonnes of diamondiferous tailings left over from previous mining operations
(ii) conduct a feasibility study on re-commencing mining operations on the kimberlite pipes
(iii)explore Moregroet and Silverbank, two adjacent exploration properties to Lace where Diamondcorp hold New Order Prospecting Rights, for further viable kimberlites.
Bulk testing of 100,000 tonnes of the tailings has suggested that 10.3 carats per hundred tonnes can be recovered using a modern dense media separation plant. Water for the plant will be provided from the open pit which is currently flooded. The plant is currently being constructed in Johannesburg and will be erected on site within the next month. It will be commissioned towards the end of May and will be processing the tailings at an annual rate of 1.6 million tonnes from the end of June yielding 160,000 carats pa. The diamonds in the tailings are smaller than those from the main mine; the average revenue is anticipated to be $70/ct, though a conservative estimate of $63/ct has been used for planning. On this basis the plant will turnover $10m pa. Since costs (at $2.50/tonne) are around one third of revenue ($6.50/tonne) the tailings will generate positive cash flow of $14m over 27 months.
The first $2m of the cash flow will be used to extract a bulk sample of 20,000 tonnes from the mine at a depth of 360 metres. This will be completed within eighteen months from the date that positive cash flow begins (i.e. by the end of 2008) and will yield information on the grade and stone size distribution at that depth thus providing the last piece in the puzzle needed to complete the Bankable Feasibility Study for recommencing mining operations. If the findings are positive then the retreatment plant will be used to treat ore from the mine. Production from the mine could begin as soon as 2009.
Diamondcorp will also be using cash flow from the first twelve months of the tailings operation to drill the kimberlites on the exploration properties adjoining Lace.
Diamondcorp hold 74% of the projects. The remaining 26% is shared equally between Diamondcorp?s two BEE (Black Economic Empowerment) partners; Sphere and Shanduka. In addition to a cash injection of R13m ($1.8m) each, both companies bring a lot to the table in the form of good contacts and connections, the possibility of other projects, political networks and big bank backing (Standard Bank and Investec are shareholders in Shanduka, as are Nedbank and Rand Merchant Bank in Sphere). Shanduka?s Chairman is Cyril Ramaphosa, the former trade union leader and ANC secretary.
Diamondcorp?s management team has extensive experience in the mining sector. CEO Paul Loudon has 20 years experience in mining corporate finance and in running junior mining companies. Chairman Euan Worthington was Head of Mining Research at SG Warburg and is well known throughout the City. Operationally Alistair Holmes and his team bring a wealth of experience to the company. His previous job was as Operations Manager for the largest private diamond mining company in South Africa (who owned the largest earth moving fleet in the Southern Hemisphere!). He has already constructed four large dense media separation plants and sort houses, and managed all the associated security, and had direct responsibility for managing a 1600-strong workforce.
Since floating in February trading has been relatively thin and Diamondcorp?s shares have fallen by 1p (around 1%) from their listing price of 90p. But the company did most of the start-up work prior to going public in February. From June it will be generating cash flow, and in the following 12-18 months there could be a slew of results from the bulk sampling on the Lace pipes and from the exploration work on the neighbouring properties. From 2009, if all works out, Diamondcorp could be producing from the mine at a higher grade and higher margin than the tailings, with the possibility of even higher grades and margins as the mining operations deepen. And the icing on the cake is that this is in an industry with an anticipated supply shortage!