Carats and cash flow. This is what the next few months are all about for Stellar Diamonds (LON:STEL), according to the explorer’s chief executive Karl Smithson.
His comments were made as the group revealed it had begun testing its dense media separation plant ahead of trial mining of the Baoule project in Guinea.
The various components have come from Mandala and Droujba, the company’s two other projects in the country.
The aim of trial mining is to establish a grade for the kimberlite, which geologists believe could be a source of some stunning alluvial diamonds found in the region. It will also help set a benchmark value for the stones.
Baoule sits in an area of Guinea called Aredor, which is renowned for producing large, very valuable diamonds.
These were the alluvial stones that have been removed from their natural source by natural erosion. So, Stellar hopes its kimberlite is one of the sources for these very rare diamonds.
“The quality of some of the alluvials [diamonds] is brilliant; the majority of the kimberlites have yet to be tested, so it is going to be interesting. Hopefully our pipe is one of the source for these diamonds,” said Smithson.
There is historic data compiled by the mining giant Rio Tinto, which undertook diamond exploration in Guinea from 2000 to 2004.
While none of it is precise enough to compile a maiden resource statement, it does give a hint to the potential of Baoule.
According to the information, the grade could be anywhere between 13 and 40 carats per hundred tonnes.
With a plan to mine an initial 100,000 tonnes, this trial mining phase should create a lot more clarity as well as bring in some much needed cash.
Stellar’s second major project is Tongo in Sierra Leone, which has the potential to become a low-cost underground operation.
It already has a JORC-compliant 1.1mln carat resource, based on one diamond bearing dyke, with another three to explore.
With a 17-year mine life and a net present value of US$53mln the estimated starting capex of US$16.6mln is extraordinarily low.
This is why the group wanted to take Tongo to definitive feasibility study (DFS) phase as quickly as possible.
However, the financial realities of today’s market for mining juniors meant it was only able to raise enough cash to carry out the Baoule work and conclude the bulk sampling of Tongo.
That said, the programme to date has been a major success. Last month the group said a total of 1,182 carats had been recovered from Tongo, taking the average grade to a better than anticipated 178.7 carats per hundred tonnes (cpht).
This was 49% higher than the 120 cpht applied in the resource estimate and represents a decent advance on the 155 cpht logged in July.
Stellar said 53 diamonds were larger than one carat, including stones of 6.7 and 4.6 carats, as it revealed that many of the diamonds were of “excellent shape, colour and clarity”.
The diamonds have now been parcelled up and shipped to Antwerp, which will help generate a modelled run-of-mine diamond value, which is currently US$248 a carat.
Analysts say an upward revision of this number or the overall grade could have a significant impact on Tongo’s net present value.
In fact, a grade of 178.7 carats per hundred tonnes would double the project’s net present value – not that the stubbornly static share price has reflected this potential upside.
The DFS, which was expected to be completed by the year-end, may now take “six to nine months” and another £1-1.5mln to finish up, Smithson said.
Experts believe there may be the potential to surface mine Tongo to fund part of the early capital expenditure to then go underground.
The Stellar CEO agrees and he and his team are still assessing the potential to do just this, though he isn’t prepared to go into detail at this early stage.
Away from the two main projects, Stellar has the three million carat resource at the high-grade but low diamond value Droujba project, in Guinea, “which I think will have its day as diamond prices continue to appreciate”, said Smithson.
Meanwhile, there is also Kono, which is hugely prospective, but over which Stellar is in dispute with the Sierra Leone Ministry of Mines.
“Things are teed up to get that back. I can’t say much more than that. It is just a long painful process, but we will get there,” Smithson said.
And finally, there is Mandala, in Guinea, where Stellar mined 130,000 carats up to 2011 but which is expected to be offloaded if a buyer can be found.
Working in Sierra Leone and Guinea, Stellar’s team is confronted with the reality of the Ebola virus and it isn’t taking the threat lightly.
It has drawn up a response plan, is working to educate the local workforce and is using the services of International SOS, the healthcare group, to ensure it is following best practice.
In common with many other companies in West Africa it is learning to work around the problem rather than running scared.
Looking at the stock, some investors will be happy with the 28% rise in the year to date.
However, this still only adds up to market capitalisation of £9mln – which, compared with the opportunity, suggests a major disconnect.
The current price of 1.37p a share offers a decent entry point based on what the brokers reckon the stock is currently worth.
Daniel Stewart has a 5p price target, Sanlam a 2.3p price target, while Charles Stanley set its sights on 2.1p.
Sanlam Securities’ Charlie Long recently met the Stellar team and he was impressed enough to upgrade his stance to ‘buy’.
He said: “Positive production results and cash flows from Baoulé will differentiate Stellar from most other juniors and should represent a catalyst for the stock."