Paul Loudon, chief executive of DiamondCorp (LON:DCP), is preparing to talk to banks, project financiers and potential rough diamond buyers.
It comes after an independent engineering report gave the green light to the company’s longstanding $50 million (£31 million) project to reopen the Lace mine in South Africa’s Free State province.
The report, by consultant SRK, suggests a net investment of $37.6 million over 25 months could generate after tax cash flow of $780 million over a possible 25-year mine life at Lace, near the town of Kroonstad, 200km south west of Johannesburg.
At a 10 per cent discount rate, the net present value of the cash flow is $188 million.
"It is great to have the project validated like this," declared the entrepreneurial Loudon.
If all goes well, he argued, Lace, where DiamondCorp has a 74 per cent holding, could be back in production by the end of 2013 after ‘being under water (literally) for 80 years’.
The mine is expected to produce more than half a million carats a year and become cash flow-positive 15 months after recommencing, with potential annual revenues of $42 a tonne before costs of only $16 a tonne.
That is the cost figure arrived at by the SRK report, which says DiamondCorp has come up with an ‘appropriate’ method for exploiting Lace.
It plans to extract gem-bearing kimberlite material by block caving at a depth of 470 metres underground.
SRK endorses a resource estimate of nearly 13.3 million carats for the mine, which was first discovered at the end of the 19th century.
It was acquired by De Beers in 1939, which shut it down as part of its strategy for controlling the worldwide supply and demand for rough diamonds.
Most of that estimate is in the ‘inferred’ category, with only 1.4 million carats under the firmer ‘indicated’ heading, with a projected value of $160 a carat.
The report puts the total cost of bringing Lace back into production at $50 million.
But, since it is seen as possible to start some production before the overall reopening process is completed, it estimates potential sales revenues at that stage will bring the net funding requirement down to $37.6 million.
"We’ve got a long-life mine on our hands," said Loudon, who added that geotechnical (rock strength) testing showed the firm that 470 metres was the optimal level to start caving.
He said: "My ideal timetable now is to reach heads of agreement [with finance providers] by the end of April and then get to draw down of the money by mid-year."
According to Loudon, some 80 per cent of Lace’s diamonds are of gem quality, mostly clear white stones, with the occasional lilac and purple.
Bulk tests completed by DiamondCorp last October, when the company also raised £2 million at 6.5p to remove Lace’s debts, showed an average grade of 26 carats per hundred tonnes of material, though "grade improves as you go deeper", said Loudon.
For Loudon and DiamondCorp’s chairman, genial corporate financier, Euan Worthington, the SRK report offers not only an opportunity to take the Lace project to serious sources of funding, but also provides vindication for the company’s arduous struggle to regain recognition for its goals.
European Islamic Bank, with 23 per cent of DiamondCorp’s equity, and other backers have, after all, seen the company’s shares plunge from their float price of 90p in 2007 to below 5p at one point over the past year.
The SRK report shifted them 0.5p to 5.63p, little more than a third of their 12-month high, where they value the company at £13.6 million.
That compares with Loudon’s estimate of $140 million for DiamondCorp’s holding in Lace, the equivalent of 36p a share, nearly seven times the current share price.
He recalled the company had invested around $36 million all told so far in the project, which, he said "management believed in from Day One".
Many others, however, did not share this faith, especially after the financial crash of 2008.
But DiamondCorp persisted, survived and is now eager to take Lace into production.
Not all the company’s projects have made progress.
DiamondCorp has recently dropped an exploration play in Botswana after disappointing results.
On the overall diamond market, which recovered strongly from its 2008 falls and advanced briskly last year, only to pause in early 2012, Loudon sees "a pick-up in the second half of this year".
Market watchers take a similar view of DiamondCorp itself, seen as showing a 2011 loss down from 2010’s £3.3 million deficit, before nearing breakeven in 2012 and making perhaps £1 million pre-tax next year.
All of which suggests a rally would not be inappropriate for DiamondCorp’s shares, too, when Loudon secures the finance he seeks.