---ADDS BROKER COMMENT---
DiamondCorp (LON:DCP) has started to get some cash from its tailing operations as it continues its advance towards full underground production at the Lace diamond mine.
The company passed a significant landmark as it reported the first sales from its tailing re-treatment activities at the mine in South Africa’s Free State province.
It made US$278,574 from 6,442 carats for US$43 a carat as it sold its first stones to Tiffany & Co subsidiary Laurelton Diamonds as part of an off-take agreement.
Broker Charles Stanley reiterated its ‘buy’ recommendation as it said that the first sale is a very positive development.
“The confirmation that the sale included the first diamonds to be sold under the Laurelton Diamonds agreement will reassure investors that the Tiffany agreement can generate considerable value longer term,” Charles Stanley analyst Kieron Hodgson said.
DiamondCorp said the recovered grade improved to US$63 a carat following modifications to the cut size of the plant. It says it considers this price to be a “fair benchmark for the economics of the tailings retreatment operation in 2014”.
“The step-up in realised prices, achieved through the actions of management, demonstrates the efforts in improving near-term cash generation,” Charles Stanley said, with the City broker declaring itself “particularly impressed with the demonstrable increase in value to US$63/ct”.
The group expects to increase throughput to around 150,000 tonnes of ore a month yielding around 7,500 carats, while costs are expected to fall substantially.
Management forecast that tailing retreatment operating costs can be reduced from R32 per tonne to R22 per tonne once three shifts are operating. As a result, the company is proceeding with a ramp up to a three-shift operation by the end of January 2014.
Speaking to Proactive Investors on the day of the announcement, DiamondCorp’s chief executive, Paul Loudon, was looking at the bigger picture and implicitly advising investors not to get too hung up on the tailings business.
“Tailings is not the main game here, but it can provide an important source of cash flow for 2014,” Loudon acknowledged.
DiamondCorp said it expects to have processed a “significant proportion” of the tailings before full underground production starts, and full underground production is very much what the “main game” is.
Until such time as the underground mine is firing on all cylinders, however, DiamondCorp will continue to tweak the tailings side of things.
“By increasing the bottom screen size it means we are recovering approximately 90% of the diamonds that we used to recover but only treating 50% of the tonnes,” Loudon explained.
That reduces the operating costs and it increases the stone size distribution of the diamonds being recovered, which in turn increases the dollar per carat.
“Diamond prices are seasonally low at the moment,” Loudon said, and that has necessitated some realism over what prices can be achieved.
“It’s more important for management to find out what the worst possible price is rather than basing your forecasts on some optimistic pricing,” Loudon told Proactive Investors.
“Seasonally, now, this is as bad as the market is going to get for small diamonds,” Loudon predicted.
“We still have a 33% operating margin at these prices, and that’s a positive,” he added.
Broker Charles Stanley has a 10.1p price target for the stock, which currently trades at around 6.02p.
“Our price target, normally generated by using a blended average of NAV [net asset value] /per share and earnings per share, is not applicable at this time. As such, we apply a 25% discount to our assumed NPV [net present value] of the Lace project to reflect the risks associated with the execution of development projects. In conclusion, we continue to believe that the current valuation discount will reduce as the Lace project moves towards underground production next year and we reiterate our buy recommendation,” the broker explained.
Another City broker, Investec, was similarly enthused by the update.
“DiamondCorp is doing well to generate cash flows from the tailings once again. The plant adjustments lower the overall recovery and production level but should make tailings treatment more profitable due to less processing required since the smaller less valuable stones will not be recovered. The main mine development is fully financed and cost savings have allowed refinancing to support corporate overheads to be deferred to 2014,” Investec said.