UPDATE: Adds comments from broker Evolution Securities
Firestone Diamonds (LON:FDI) is set for a US$863,037 cash boost following its latest diamond auction in Gaborone in Botswana.
The company offered much larger volumes in this latest auction, thanks to its growing production at the Liqhobong and BK11 diamond mines, in Lesotho and Botswana respectively.
It made 24,109 carats available for sale - 69 per cent more that in July - however a drop in overall rough diamond prices meant that around 20,000 carats, principally comprising smaller diamonds, did not meet their reserve prices and consequently these diamonds were not sold.
In total 3,395 carats were sold for US$863,037. Of these sales 1,846 carats came from Liqhobong with an average price of US$231 per carat, while 1,549 carats were from BK11 and were priced at US$282 a carat.
"We have continued to make significant progress at both Liqhobong and BK11, with a 69% increase in production available for sale from the last tender in July 2011,” said chief executive Tim Wilkes.
"Although demand for smaller diamonds has decreased, it has remained firm for larger, better quality diamonds, and we are confident that we will see increased demand for our full range of production later in 2011."
After the auction Firestone received a number of enquiries about the un-sold diamonds, but today it said that these diamonds will be held over to the next sale, which will occur later in the fourth quarter.
“The company expects that stability will return to the rough diamond market later in 2011 and that the shortfall in rough diamond supply will limit any further significant decreases in rough diamond prices,” Firestone said.
It also clarified that its cash position remains secure, following its £13.5 million financing in July, and therefore it has the ability to withhold any production that does not achieve reserve prices until stability returns to the rough diamond market later in 2011 or in early 2012.
Firestone explained that rough diamond prices increased approximately 40 per cent during the first half of this year, driven by significant growth in demand from China and India, but since the beginning of August prices have fallen back around 15 – 20 per cent.
"Fundamentals remain positive, with demand from China and India and shortfall in supply expected to continue to support prices,” the company said.
Evolution Securities mining analyst Charles Kernot showed his faith in the company, repeating his ‘buy’ recommendation in a note to clients today. “This is based on our view of the longer term fundamentals of the diamond sector and our belief that the group has significant long term potential in its Liqhobong asset.”
Kernot's 'buy' recommendation comes with a 40 pence a share target, which suggests the stock could almost double from the current price of 20.75 pence.