DiamondCorp (LON:DCP, JSE:DMC) was very pleased with the results of the cost review at its Lace mine in South Africa. The company achieved the main goal, which was keeping the operating costs to 105 rands per tonne and offsetting the anticipated increase in electricity tariffs.
Chief executive of DiamondCorp Paul Loudon told Proactive Investors that with this main target met, the Lace mine could see its profit margins jump to over 70 percent if all goes to plan.
He added: “The challenge was to be able to keep our operating costs as low as possible in an environment of rising electricity prices in South Africa. So that was very pleasing for us.”
DiamondCorp’s financial projections are based on three diamond prices: a base case of US$120 per carat, a middle case of US$140 per carat and an upper case of US$160 per carat.
All bases used an initial mining grade of 24 carats per hundred tonnes (cpht). The grade is forecast to rise to 40 cpht after the first eight years of mining when the deeper, higher grade CK kimberlite is mined.
A grade of 24 cpht implies an annual production of 294,000 carats, while a 40 cpht grade takes this figure to 490,000 carats.
Should the price forecasts be accurate, and if grades at depth match those forecast in the geological model, the margins could be significantly higher than even the initial 46 percent estimate. According to Loudon, the Lace mine could be looking at margins of more than 70 percent.
DiamondCorp also notes that electricity tariffs in South Africa are expected to rise 26 percent in 2012 and go up further in the following two years.
The company, however, anticipates the impact of the increase in electricity prices will be offset by the introduction of conveyor belts to surface - key in keeping the costs low enough to ensure high margins. The conveyor belts will increase development costs, but reduce operating expenses over the life of mine.
DiamondCorp has limited exposure to any other costs but electricity.
“Internal cost inflation does not impact us that greatly because the labour cost is not huge here,” said Loudon. He also pointed out as an example that the company takes diesel, which represents the main cost for the operation, at international prices.
Broker Ocean Equities welcomed the report, noting that it has always known that the profit margin at the Lace mine would be robust, while using a conveyor system rather than a shaft hoisting system will help to ensure the margin widens.
Ocean added: “This is another example of how the Lace mine is greatly benefiting from the application of contemporary mining techniques used in the gold mining district. After all, Lace is a very simple operation in comparison to the gold mines in the vicinity.”
Loudon does not seem to worry much about diamond prices, which have gone up considerably after plummeting in late 2008.
The only risk posed to the prices in the short term is the possibility of a double dip recession in the US. However, the long-term outlook appears to be as good as ever with DiamondCorp going as far as projecting that the prices will double in US dollar terms in the next ten years.
“Short-term there may be some fluctuations, but long-term the metrics are incredibly strong. We are down to this supply for the next 20 years,” said Loudon, noting that there has not been a new significant source found since mid 1990s.