Paragon Diamonds (LON:PRG) is putting together a compelling proposition using a blue-print more commonly found in the gold sector.
It has discovered a low cost project in Lesotho offering the prospect of near-term production whose revenues will then be used to develop a potentially world-class opportunity in the same country.
For investors interested in blue-sky, then it has the Kaplamp lamproite pipes first discovered by the giant De Beers in the 1970s.
In Lemphane, the group has a project that is similar in size (and hopefully geology) to the Lucara’s Mothae mine and, to a lesser degree, Letseng, owned by Gem Diamonds.
In fact if you look closely there is more than a passing resemblance between Paragon and Gem with their mix of projects, though Gem is, of course, several years more advanced than its smaller peer Paragon.
“We feel we have got the pipeline of projects to be a producer the calibre of Gem Diamonds in four or five years’ time,” said managing director Stephen Grimmer.
In the meantime Grimmer and his team must confirm the potential of Lemphane, which is also a near neighbour of the Liqhobong and Kao kimberlite pipes.
Unlike others in the region Paragon’s is a greenfield project with none of the legacy issues or past mining depletion associated with some of those mines.
“We are having to do the basic science first, but we are dealing with a virgin project which has not been subject to mining or other degradation in the past,” said Grimmer.
“This brings with it a little bit of risk, but also brings the advantage that you are not dealing with the legacy issues some other projects might have.”
If Lemphane shapes up in the same way as Mothae and Letseng, then it will be a low-grade, high-quality mine producing large diamonds.
“Kimberlites in the Lesotho are generally very low grade,” Grimmer explained.
“We are generally talking about two-to-five carats per hundred tonnes, whereas the world average is closer to 100.
“It does make them rather technically challenging to develop and evaluate and you have to be very careful with sampling and statistics.
“But it is a price everybody is very happy to pay for entry into such a niche market for big stones.”
The initial grade of 2.2 carats per hundred tonnes was taken from the first 2,350 dry tonnes, which yielded six stones of between 2 and 6.3 carats and an average diamond size of 0.46 carats.
However a better indication of the true grade will only be discerned once bulk sampling has been completed.
A total of 35,000 tonnes has been excavated from the Lemphane pipe with the processing work on that stockpile starting this quarter.
It is worth considering that the first 10,000 tonnes of ore from Mothae gave an initial grade of 1.5 carats per hundred tonnes but by the time bulk sampling had been completed, the grade had more than doubled to over four carats per hundred tonnes.
An ore value of circa $20 to $25 a tonne is likely to be economic, said Grimmer.
"So we would need to achieve $400-$500 a carat at the anticipated grade” he added.
The Paragon MD hopes to have bulk sampling completed by the end of the year, which along with a modest drilling programme should put the company in the position to produce an initial resource estimate.
“We should also be on our way to undertaking a scoping study by the end of the year,” Grimmer added.
But we are still around two years and US$50-$100 million away from having a fully functioning mine at Lemphane.
There is, as mentioned earlier, a far more immediate prospect of cashflow - the Motete Dyke, also in Lesotho.
Micro-diamond analysis suggests a grade of up to one carat per tonne, although a production grade of 0.65 carats per tonne is more realistic.
And although the stones are small, they are of decent quality with a “model value” in the order of US$160 a carat.
At around 1.5 metres wide the dyke can be mined with relatively little dilution.
The capital costs of the project, meanwhile, are expected to be comparatively low at US$6-10 million.
The initial expectation is Paragon will mine around 1 million tonnes of ore over the next three years, generating a gross pretax profit of anywhere between US$16 and US$20 million annually.
Paragon has taken out 1,800 tonnes of ore from the dyke for a bulk sample, which will be processed next month and August.
A low-cost operation could be up and running as early as first-half of next year.
With the company’s alluvial diamond project in Sierra Leone “now playing a much reduced role in our portfolio”, the third leg to Paragon is Zambia.
There it has two licences – one, Kabale River, is prospective for kimberlites. The second, known as Kaplamp, covers 863 square kilometres, and is host to 14 known lamproite pipes.
De Beers recovered a significant number of stones from the area in the 1960s and ‘70s, but at the time - before the major Australian discoveries - lamproites were not recognized as viable economic diamond sources.
Of course this theory has since been comprehensively disproved by the discovery of the Argyle Mine in Western Australia, which at its peak was the largest diamond producer in the world by volume.
“You have to look at what De Beers was doing at the time to understand that decision,” said Grimmer.
“This was 1970s, when they were just really forming Debswana. They had just got Orapa and Jwaneng on the go.
“Maybe they weren’t interested in what they deemed an isolated, unconventional deposit in what at the time was a politically more difficult area of the world.
“The big money at the time was in places such as Botswana.
“We think it is worth revisiting. It is not going to cost us a lot, but our main priority is obviously Lesotho.
“But we intend to do some brown-field work to replicate what De Beers did, with hindsight and knowing what potential lamproites can ultimately have.”
The group also has licences in Tanzania and Botswana, as well as the alluvial project in Sierra Leone.
However, the focus for the company’s capital and time will be the three carefully chosen strategic projects in Lesotho and Zambia.
“The combination of highly prospective exploration ground, an impressive management team and an aggressive sampling programme gives us confidence that the positive news flow that is expected to be generated over the coming 18 months will be well received by the market,” said Fox-Davies analyst Juan Alvarez recently in a note initiating coverage of the stock.