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European Diamonds Plc: Turning point?

Unfortunately a further fund-raising announced last week, although well-flagged by broker Canaccord Adams in its notes of 11 April and 26 June, has hurt the price still further, and it?s now just 15p to buy, on negligible trading volume. £3.15 million was raised at 15p, accompanied by the sweetener of a full warrant for each share placed.

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European Diamonds has been having a torrid time of it lately.

Currently working up to full production on the Satellite Pipe on its Lesotho Liqhobong property, and having commenced bulk sampling at the nearby larger Main Pipe, the company also has kimberlite assets in Finland at a relatively early stage of exploration, where bulk sampling is currently underway.

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Until news in June of a further Liqhobong diamond sale in Antwerp ? the company?s third - and the discovery of two 20+ carat gem quality diamonds in the Main Pipe bulk sample perked the price up a little, the share price had been sitting at an all time low of just 16p to buy. Continual delays in Lesotho ? both real and apparent ? and successive fund-raisings, one of which was badly managed and partially aborted, have hurt the price in recent months, and investor confidence has been ebbing steadily away.

Unfortunately a further fund-raising announced last week, although well-flagged by broker Canaccord Adams in its notes of 11 April and 26 June, has hurt the price still further, and it?s now just 15p to buy, on negligible trading volume. £3.15 million was raised at 15p, accompanied by the sweetener of a full warrant for each share placed. The warrants are valid until July 2009 and have a strike price of 25p. Not yet a dilutive threat as they are way out of the money ? but it is more than probable that these further 21 million shares will be taken up at some point in the future.

 

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Crumbs of comfort in this announcement were twofold: the tranche taken by director Tony Williams via the Dragon Group, adding to his recent buying splurge, and the unstated but implied assumption that this funding would see the Satellite Pipe through to full production in Q3 of this year. EPD now have the cash in the bank to accomplish the optimizing of screens, and other improvements to the recovery plant and tailings disposal system at Satellite. They also have cash in the kitty to enable them to continue the processing of bulk samples taken in Finland last year, and to continue with the important bulk sampling from the higher-grade K5 area of the Main Pipe adjacent to Satellite. The resultant grade achieved from K5 ? followed by systematic sampling of other areas of the pipe and a feasibility study during 2007 - will assist the company in their decisions regarding how Main Pipe will be mined. One scenario they envisage is that of accelerating the mining of Satellite and stockpiling the ore mined for later processing, which would release an empty pit for use as tailings disposal for selective mining of K5. Alternatively, if all areas of Main Pipe taken together can produce an overall economic grade, a further plant could be build at a cost of approx $25 million. All in all, an encouraging long-term African picture.

Even so and in spite of the current valuation by Canaccord Adams of 33p per share, investor sentiment is at an all-time low and many private investors are beginning to believe that full production at Satellite will never actually be achieved.

The reality is somewhat different.

Delays are endemic in exploration and mining. The one rule you can be sure won?t be broken is the one that states: ?If it CAN go wrong, it certainly will!?. Add to the usual vagaries the situation of the Lesotho properties ? high up in the mountains with little or no infrastructure ? and it begins to seem like a real achievement to have built a mine there in the first place. Let alone to be shipping out diamonds to Antwerp and selling them at roughly the forecast price of $40+ per carat.

The company has now achieved three sales, and a further sale is in the offing. All have been reasonable in terms of quantity and value, considering that the mine is still in work-up. It is to be hoped that future sales, especially in Q4, will illustrate that experienced general manager Chris Sangster, appointed in March, is having an appropriate impact and that the full production targets ? which the company is now financed to achieve - are actually being met.

 

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It?s also hoped that the run-of-mine carat value will reflect the increased price of diamonds since the target of $40+ was set in 2004. This has not yet been evident, but may be aided significantly by the fancy yellows prevalent at Liqhobong. Good bright yellows are much prized, and CEO Roy Spencer reports that these are attracting attention at the Antwerp sales and are becoming sought after. If that is truly the case, and continues to be so, then the price per carat should bear witness to the increased value of the mine output.

In Finland, the company continues to plod along with their eight year long exploration effort on the Karelian craton. Processing of the remaining Lahtojoki bulk samples ? now almost legendary! ? is finally under way, and is expected to be complete by the end of this year. Results from early processing gave a barely economic grade of just under 15 cpht, but the company is confident that the remaining samples from other areas of the pipe will produce a better overall grade. The recently identified Area 3 kimberlite has also turned up some encouraging results from a small sample, and further evaluation work is ongoing. EPD are also pressing on with sampling and drilling of other nearby areas which show distinct promise.

But it?s Lesotho on which the company?s future really hinges ? and where the most conspicuous delays have occurred. The failure to reach full production on schedule has led to repeated issues of equity for cash, numerous EGMs to authorise them, and an erosion of market confidence in the company?s ability to deliver. With luck and a following wind ? plus, of course, the all-important £3 million in the bank ? EPD might at long last be able to put Satellite (and later the Main pipe) into full production and convince the sceptics that it can indeed become, in the words of Roy Spencer: '?one of the largest independent diamond producers in the world.'

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