DiamondCorp (LON:DCP, JSE:DMC) shares moved against the downbeat mood on the London stock market today, rising nearly 9.5 percent on news of a successful auction this week of tailings diamonds in Johannesburg. The stock was last trading at around 14 pence in afternoon deals.
The group sold 1,321 carats of diamonds recovered from tailings during plant re-commissioning at the Lace mine in South Africa for US$94 per carat. The sale was intended to determine the current market price for Lace tailings diamonds.
The price achieved compares with US$55 per carat received in September 2008, the last time the company tendered tailings diamonds prior to the diamond price collapse in October 2008, and US$33 per carat received in May 2009 at the bottom of the market.
DiamondCorp chief executive Paul Loudon said: “The high sales price achieved for tailings diamonds underlines the current strength in the diamond market and provides considerable promise that the company’s base case of US$120 per carat for diamonds from the Lace kimberlite will be comfortably exceeded.”
A parcel of diamonds recovered from initial processing of kimberlite from the Lace pipe is scheduled to be tendered in the June quarter. The underground mine development project is on schedule to access the main kimberlite pipe at the sub-260 metre level in March.
Brokers welcomed today’s news and are eagerly awaiting results from the first bulk sampling of the Lace kimberlite which is expected in the second quarter of 2011.
Cenkos Securities said it is currently running an estimated average diamond value from fresh Lace kimberlite as US$120 per carat. “This news implies that the average diamond price from the fresh kimberlite when (and if) Lace starts production should be in the region of US$150-175/ct.”
“We maintain a buy on DiamondCorp, assuming a further raise for production and so including dilution due to additional capital requirements we upgrade our value of Lace to £66m or 36p per share dependent on positive bulk sample results, the broker added.
This does not include any value for Botswana which is one to watch as the sampling program continues, it said. DiamondCorp is soon starting a drilling programme at Jwaneng in Botswana on the first of two diamondiferous kimberlite pipes which were intersected there during drilling last year.
Ocean Equities also commented on the auction news today, saying that over the last few months it have noticed a steady increase in rough diamond prices as well as increased mergers and acquisition activity within the diamond mining space. “DiamondCorp’s recent sale confirms the trend.”
“Assuming a higher average diamond price has a significant impact on our valuation of DiamondCorp, as does assuming that the next capital raising is completed at higher price thus reducing dilution.”
Ocean now envisages that DiamondCorp will be able to raise the £8.5 million at a higher price than it had assumed when it initiated coverage in December 2010. It fully expect there to be a significant re-rating once the diamonds from the bulk sample are tendered late in the second quarter.
“Assuming the original base case carat value of $120/ct, reducing the dilution gives us a target of 27p on an attributable NPV basis. Using a slightly higher carat value of $140/ct lifts our target price by 30%.” Ocean said.
Fairfax issued a very upbeat note, calling the results of the tailings diamond sale “spectacular”. It reiterated its ‘buy’ rating and for now, it still keeps a target price of 23p. It raised the target from 17 after a recent site visit.
“Today’s results imply that our assumed US$120/carat could be well short of the mark, and the impact higher diamond prices could have on the company’s valuation is substantial. We currently value the company at 23p, however, if normalising the last diamond sales from kimberlite to current market conditions the stone value would be closer to US$140/carat which would take our valuation to 30p/share.”
However, tailings values can imply fresh kimberlite stone valuations of 1.5-2 times this level. At 2 times valuation or US$188/carat, its numbers imply a valuation of 43p per share.
“The next few months are looking increasingly exciting and we eagerly await the results of the bulk sample that could outperform from a grade perspective as well as a stone valuation. Lace is looking increasingly likely to be a highly attractive diamond asset with considerable upside potential. The exploration portfolio in Botswana is also looking very interesting and bulk sampling is planned that has the potential to lead to another economic asset, although we have not attributed value for this as yet,” Fairfax concluded.