DiamondCorp (LON:DCP, JSE:DMC) hailed continuing solid progress at its key Lace mine in South Africa today and says it plans to raise £10-12 million this year to take the mine into full production.
In its annual report to shareholders the company says that following a year of “great progress” at Lace, the next 12 months should see its efforts over the project bear fruit.
Initial recoveries at Lace remain positive, and management is confident its base case revenue forecast of approximately $30/tonne will be met, comprising a grade of 24 carats per hundred tonnes (“cpht”) and carat value of $120 per carat.
Since its year end, the company has carried out a detailed life of mine review on Lace.
Among the findings is that while the introduction of conveyors has resulted in an increase in development costs, the move has also provided significant savings on life of mine operating costs given the anticipated increases in South African electricity prices in the years ahead. Their introduction, furthermore, has had a minimal impact on the development schedule.
The review also indicates that diamond grade is forecast to rise to 40 cpht after the first eight years of mining when the deeper, higher grade kimberlite is mined.
Diamond revenue, meanwhile, is estimated to be between R196 (£17.50) and R261 (£23.30) per tonne. Operating costs are estimated to be R105 (£9.38) per tonne, resulting in an initial operating margin of between 46% and 60%.
The company says that if bulk sampling at the Lace mine is positive in terms of grade and carat value, it will need to undertake a significant capital raising in order to complete full scale mine development.
“The sooner we can raise our development capital after the bulk test, the quicker we will be able to add value for shareholders by completing the full scale mine development at Lace” it adds.
Earlier this month it raised £3.48m gross at 13p to fund its exploration programme in Botswana and general working capital.
To take Lace into full production, and to retire the $1.85 million of equipment debt on its balance sheet, it will this year seek to raise a further £10-12m.
With these funds, the total DiamondCorp will have spent on bringing Lace into full production is expected to be around £30m – a “very low number” for a 1.2mtpa operation, it says.
More broadly, the diamond pricing backdrop is highly encouraging for the company. It says the market has made a “staggering recovery” from the depressed levels of mid-2009 thanks to demand from increasingly affluent Chinese and Indian consumers.
In February 2011, the company sold a package of 1,321 carats recovered from the Lace tailings for an average of US$94/ct which compared to the highest price it received before the crash of $55/ct in September 2008 and the lowest of $33/ct it received from a small sale in May 2009.
DiamondCorp adds: “The outlook is for demand to remain strong in Asia while a slow recovery in the US economy should also boost consumption, which is important as the US remains the largest diamond market accounting for some 40% of offtake.”
The company’s exploration activities in Botswana, meanwhile, are continuing apace. There, it has a 77.5% joint venture interest in Prospecting Licence PL/71 in Botswana, immediately south of De Beers’ Jwaneng mine, the richest diamond mine in the world by value.
DiamondCorp is “very pleased” that exploration at PL/71 has so far resulted in two diamondiferous kimberlites for mini bulk testing, providing it with a pipeline of promising diamond exploration projects in Botswana. Results from the bulk sample and valuations are slated for release by the end of July.
Looking ahead, the company concludes that while it is under no illusion that there will be hurdles ahead, the “exciting outlook” for diamond prices means it can now look forward to producing revenues and profits from Lace while setting out to sample its two highly promising kimberlite targets in Botswana.
Analysts at Fairfax, led by John Meyer, responded positively to the statement, highlighting Lace in particular: “It is one of the most interesting and exciting mining prospects in the market. “
Meyer adds: “There is considerable potential for the mine to produce some very valuable stones and diamond experts will be keen to see production from the bulk sample.
“If some pink and purple stones are recovered then the significance of the Lace mine should take on new meaning and with it new value. We are look forward to the results at end-July. “
Meyer explains that pink and purple are extremely rare and if found could attract strong international interest for offtake from this mine.
The analyst also echoes the company’s excitement of the company’s management over the climate for diamond prices.
The $94/ct secured for diamonds recovered from tailings in February 2011 is “significantly better than previous sales and highlights the recovery of prices in the diamond market in general and for the types of stones recovered from the Lace mine,” says Meyer.
As for DiamondCorp’s plans for further funding to support Lace, Fairfax notes the company’s guidance that it will take place follow completion and valuation of stones from the bulk sample this year: “We believe the company should recover a number of 5ct plus stones within the sample and that the presence of these stones should increase the per carat value substantially. “
Meyer says a number of options may become open to management for the raising of funds, including offtake agreements, bank finance and equity derivative products as well as a further equity fund raising.
Fairfax rates DiamondCorp shares a buy, with a price target of 23 pence.