?European Diamonds has been having a torrid time of it lately.?
That?s how our last report on European Diamonds (EPD) began ? and regrettably, the few months that followed our July overview were no less torrid.
Their diamond mine in the Lesotho mountains at Liqhobong continued to be beset by delays throughout the second half of the year. Consisting of 2 adjacent pipes, the producing Satellite and the Main pipe undergoing advanced exploration, the Liqhobong project had originally been forecast to produce 290,000 carats per annum from early 2005 onwards. But by late summer of 2006, the plant at the Satellite pipe was still only running at 50% capacity and struggling to cope with difficult ore conditions.
In July the company raised over £3 million, part of which was committed to plant upgrades, as later explained by EPD's CEO Roy Spencer: "Difficulties in simultaneously processing both the weathered near surface clay rich kimberlite and the deeper and harder fresh material required us to design, procure and install various additions to the diamond recovery system. Despite severe winter snowfall and long lead times for delivery of mining and processing equipment being experienced worldwide, we are making good progress towards full production.? It had also been decided at the same time to improve the recovery of smaller diamonds, which Antwerp sale data had indicated could be sold at economic prices.
Investors were not impressed by this continuing delay and the share price reflected their disappointment.
EPD did, nevertheless, serve up some substantial successes during the second half of the year. Test work and bulk sampling at the Main Pipe revealed that the K5 zone was far higher in grade than the original scoping study had estimated. By August, sampling was showing a grade of 27 cpht, and in November a 4,246 tonne bulk sample yielded a grade approaching 46 cpht, almost 3 times better than the 16.2 cpht indicated by earlier exploration. This data, added to the results of previous work, enabled financial, mining and recovery models to be integrated into the Scoping/Preliminary Feasibility Study which was well under way..
Successive sales of output from Satellite, and increasingly from the Main sampling effort, were steadily generating increasing income, culminating in the December 2006 sale when 11,608 carats were sold in Antwerp for US$2.17 million. The parcel included several of the fine, larger stones from the Main Pipe, one of which, the 27.7 ct Type IIa fragment discovered earlier in the year, fetched what Roy Spencer believes is the highest per-carat price ever paid for a Lesotho diamond. Given the prices paid for the prodigious stones discovered regularly at the Letseng mine, this is highly encouraging. Even the run of mine stones fetched over $70 per carat, and the high-colour whites from Main and Satellite?s fancy yellows are beginning to gain a following.
Finally, on 15 March the company were able to say that Satellite is now close to reaching its target output following completion of most of the plant upgrades, with only a new crusher (already on site) remaining to be commissioned. A new 20 year mining licence for Liqhobong has been negotiated with the Lesotho Government and now covers both pipes ? instead of just Satellite ? with the Government retaining a 25% interest. Work is progressing apace on the Main pipe prefeasibility study, and the presence of rare Type IIa diamonds has now definitely been confirmed, suggesting high potential for larger, more valuable stones, which would increase both grade and value per carat. The outcome of the pre-feasibility study is due in the second quarter and may show a substantial advance on the original production forecast. All being well, the company will proceed to a full feasibility study during 2007/8, which, if favourable, could lead to production by early 2009.
So are the delays and dilution a thing of the past? It looks like a fair assumption. The share price has recovered ground since its all time low in November, as canny investors begin to see the long term prospects masked by all the delays. EPD aren?t quite out of the woods yet, but with a secure mining licence and ample evidence of high quality, saleable diamond production, at just £13.5 million market cap, European Diamonds have a better risk/reward ratio now than they have ever had.
At Liqhobong, the surprises produced by Main pipe have disrupted the original financial forecasts. But from Satellite alone, EPD?s 75% share of the base-case cashflow should bring in £2.5 million pre-tax in a year of full production. Now that Main pipe sampling output is being blended for sale with the Satellite diamonds, revenue could increase rapidly, particularly if run of mine sales can sustain the $70 per carat achieved in December.
If all goes well in the next few weeks, EPD will at last be funded ? albeit two years late - to pursue their dream of producing a million carats a year from their mountain-top eyrie in the middle of Africa.