Northland Capital has started coverage of DiamondCorp (LON:DCP) with a ‘buy’ rating and a 15 pence price target, giving it massive upside to the current level of 5.25 pence.
The group is currently developing the Lace mine in South Africa with initial production expected in 2013 and full production by mid-2014.
The strategy is not to remain a one mine company, but use the Lace mine as the cash flow generator on which to build a medium-sized mining company.
The mine is located in the Free State Province. It was operational from 1901-1931 and was closed and flooded by De Beers as part of its efforts to control the diamond market. It has a total resource of 13 million carats.
Analyst Dr Ryan D Long said in the broker note that underground bulk sampling completed last year confirmed the kimberlite grade, and the South African Diamond Exchange in February valued the Lace diamonds at an average price of US$172 per carat.
This is a higher average price per carat than Petra Diamonds’ (LON:PDL) flagship mines Finsch and Cullinan, with US$129/ct and US$128/ct, respectively, he said.
DiamondCorp’s share price fell in 2011 despite the successful completion of a bulk test at the 250 metre level that produced a higher carat value than anticipated and grades in line with expectations, Long explained.
According to the analyst, investor fears that the funds needed to develop Lace would come from a dilutive equity source brought the share price down from a high of 14.8 pence in May 2011 to the current price of around 5.25 pence.
Equity is not however, expected to be the source of funding for developing Lace, according to what chief executive Paul Loudon told Proactive Investors in a recent interview, Long noted.
The group is currently talking to banks, project financiers and potential rough diamond buyers about debt facilities and expects to sign a heads of terms agreement within the next month.
“If the debt facility is in place, we expect the share price to increase as investor fears are alleviated,” Long said.
The analyst believes this to be one of at least two significant developments that could result in a share price rise this year. The other is the restart of tailings reprocessing which will provide a revenue credit to development costs at Lace.
“Based on a cash flow analysis of the expected mining operations which assumes debt financing of US$37.9 million for the project and an 11 per cent interest rate on the debt we calculate a target price of 15 pence and initiate on DiamondCorp with a BUY rating. We expect full year 2011 results to be released towards the end of June 2012,” Long concluded.