Fairfax today advised investors to buy DiamondCorp (LON:DCP), which is expecting to secure funding for its Lace diamond mine in South Africa at the end of July.
Last week, the company entered into a loan funding term sheet with the Industrial Development Corporation of South Africa Limited (IDC).
IDC will grant DiamondCorp’s 74 percent owned subsidiary Lace Diamond Mines a loan of 280 million Rand, or around £21.3 million, which will cover over 98 percent of the estimated capital required to establish a block cave development on the 47 level at the mine.
The mining at that level will be in kimberlite and the company expects its first revenues before the end of the first quarter of 2014 with full production in the second quarter of 2015.
The group's latest estimate for the total cost of development at Lace is R384 million, but with revenue expected from diamond sales after 18 months, the peak funding requirement is forecast to be R285 million.
“Once the funding is signed off, the company is well placed to start accruing value from the Lace mine and we remain buyers,” said Fairfax analyst John Meyer.
In today’s full year report, DiamondCorp said it was confident about the future of the diamond market, saying strong demand from China, India and other Asian countries should add to a growing recovery in US consumer demand.
“As we and many other observers have noted before, the only significant new source of diamonds worldwide are the Marange diamond fields in Zimbabwe,” said chief executive of DiamondCorp Paul Laudon.
“These stones are having some impact on the smaller and lower quality end of the diamond market but are not expected to fill the emerging gap between supply and demand, particularly for stones over 1ct.”
Meanwhile, Meyer also noted that DiamondCorp will continue to process tailings with two million tonnes left to treat.
The company is currently recovering up to 3,000 carats per month, which they are processing at R27 per tonne and getting revenues of R35 per tonne, generating some cash flow to cover overhead costs.
The analyst added that an end market for some of the waste rock will also bring some small but useful working capital cash flow during development.
Meyer upheld his 'buy' recommendation on the stock with a target price of 22 pence per share, which represents a massive premium to Wednesday's closing price of 5.13 pence.