DiamondCorp’s (LON:DCP) Lace mine development could potentially be self-funding according to research by Fairfax analyst John Meyer.
In a note to clients, Meyer said that on his numbers an eleven per cent increase in diamond grades for the rest of the current 30,000 tonne bulk sampling programme would generate sufficient revenue to cover the mine’s development costs.
This morning, DiamondCorp told investors that it has retrieved and processed 5,514 tonnes of kimberlite through the bulk sampling programme at Lace.
So far the group has only processed around 20 percent of the kimberlite pipe, and as expected, much of the material has so far been of a lower grade – material referred to a ‘diluted contact kimberlite’.
“On our numbers if the average bulk sample grade increase by 11 percent then the value per tonne mined could match the cost of development,” Meyer said in a note to clients.
“This means that the company could, in theory, pay the capital cost of its ‘full mine’ development through the sale of stones mine in this process. One or more, special gem stones, could even cover much of the working capital increase and other associated costs.”
The analyst added: “This is great news from DiamondCorp with grades and values now expected to run significantly higher than forecast through much of the rest of the 30,000t bulk sample.
“Additional revenue to be gained from the sale of recovered stones should have a marked impact on the project economics and could lead to a significant gain in the value of the project.”
Meyer has a ‘buy’ recommendation on the stock with a 23 pence target.
In this morning’s statement DiamondCorp managing director Paul Laudon told investors that he is ‘absolutely delighted’ with the quality of diamonds that are being unearthed through the bulk sampling programme at the Lace mine in South Africa.
Crucially Laudon added that the mine could be a ‘significantly higher cash generator’ than DiamondCorp initially thought, as rising diamond prices could lead to a reduction in the mine’s breakeven grade from 13 to 8 carats per hundred tonnes.
The company explained that the tonnage processed so far represents less than 20 percent of the total 30,000 tonne bulk test, and it comes from less than 20 percent of the total sampling area. The average recovered grade of this 'diluted contact kimberlite material' is 13.76 carats per hundred tonne (cpht), but DiamondCorp stressed that this figure is not indicative of the whole pipe.
Meanwhile an additional 1,500 tonnes of kimberlite has been hauled to surface, from the south west side of the pipe, for processing. Mining continues in a northeast direction across the pipe.
“Sampling started in what historically was described as the "stony ground" side of the pipe, where waste inclusions dilute the grade and is moving progressively northeast across the pipe into the zone where historically the best recoveries (higher grades) were reported,” DiamondCorp said in a stock exchange statement.
The company emphasised that it has chosen to carry out the bulk sampling this way because the development drives that it puts in place now will allow it to access the highest grade kimberlite first once full-scale mining begins.
To date 759 carats of diamonds have been extracted and the biggest stone was a 16.08 carat non-gem diamond.
From these samples the first 561 carats have been valued, by the SA Diamond Exchange, at an average price of US$205 per carat. Notably this valuation comes in at a 71 per cent premium to DiamonCorp’s base case of $120 per carat, and 28 per cent higher than the upper case valuation of $160 per carat.
The largest diamond in the parcel to date was a ‘sawable’ gem of 5.52 carats valued at US$1,500 per carat.
The bulk of the value in the parcel lies in gem stones of between 1 and 4 carats, and more than 80 per cent of the diamonds recovered to date are gem quality. This is an exceptionally high proportion for run-of-mine kimberlite, DiamondCorp said.
Forecasted revenue per tonne, on the kimberlite extracted to date, is US$28.21 per tonne.
The company points out that this represents 98 per cent of the base case of US$28.80 per tonne, even though the parcel valued to date represents less than 10 per cent of the diamonds that are expected to be recovered through the bulk test.
“We are reporting on what we expect to be the lowest grade sections of the pipe at this level as this area has been sampled first. Nonetheless, we are absolutely delighted with the quality of the diamonds we are recovering,” Loudon said.
“Further, the dramatic increase in carat value has the potential to lower our forecast breakeven grade from 13 carats per hundred tonne to 8 cpht, meaning Lace could be a significantly higher cash generator than initially thought.”
The group did caution, however, that the sampling rate is slower than originally planned due to poor ground conditions in and around the areas of the lace mine that were operated back in the 1930s.
Consequently the 30,000 tonne bulk sample will now be completed in September.
DiamondCorp stressed that the poor ground conditions will not affect full-scale mine development or mining rates at the planned production level, where pre-existing development drives are minimal. In fact it points out that the conditions will actually to assist with the caving of kimberlite.
“While we wish it was possible to extract the bulk sample at a faster rate, for safety reasons this is not possible,” Laudon said.
He added: “Opening up old workings which have been under water for more than 75 years has particular challenges and our emphasis is always on ensuring the safety of our workforce.
“Pleasingly, the old mine plans have proven to be very accurate both in terms of elevation and the position of old tunnels. And now, as we are sampling, the kimberlite descriptions from the old manager's reports are also proving accurate."