-- adds broker comment, share price --
DiamondCorp (LON:DCP) has signed a US$7mln royalty funding deal for its Lace mine development in South Africa.
Acrux Resources will advance the money in return for a 3% net revenue royalty on the first 12mln carats of diamonds recovered from Lace after deduction of diamond marketing costs.
After eight years DiamondCorp’s Lace subsidiary, LDM, can buy back the royalty from Acrux, a Johannesburg-based resource-focused investor that recently set up the alternative mining finance fund Ata Resources Fund 1.
The US$7mln will be used for the ramp-up of production from Lace mine during the second half of 2015.
Initial production is expected to be 68,000 carats (cts) from run of mine material with an additional 22,500cts from tailings processing. Output is expected to ramp up steadily to around 440,000cts per annum by 2017.
Life of mine should be at least twenty-five years and may be longer if mining goes deeper.
Paul Loudon, DiamondCorp’s chief executive, said the deal gives it cash when its shares trade at a significant discount to Lace’s underlying value without the dilution of a large equity issue or additional debt.
“By creating an asset out of a small part of Lace's future cash flow and exchanging that for cash now, we significantly boost cash reserves while only incurring a small reduction in management's assessed net present value of DiamondCorp's 74% interest in LDM.”
Brokers had mixed views on the deal. Panmure Gordon raised its target price to 25p (19p) saying the cash now eases the risks.
“Whilst the impact of this transaction is a small (1p per share) reduction in our DCF valuation it significantly de-risks the DiamondCorp investment proposition."
Northland was less happy with the deal, however, and said lender Acrux could receive around US$56mln in royalties for its US$7mln upfront assuming a price of US$160 per carat.
The broker added it had expected DiamondCorp to have sufficient cash to finish the Lace development without the need for more funding.
Shares rose 4% to 8.31p.