DiamondCorp - Bulk Testing News on the Horizon

Friday, May 13 2011 by
8
DiamondCorp  Bulk Testing News on the Horizon

Sparkling in a corner of my portfolio is Diamondcorp (LON:DCP).  We are waiting for exciting news that could propel this little known company into the limelight.  

The Lace mine operated in South Africa for 31 years from 1900 to 1931 and only reached the 240m level. Approximately 750,000 carats were recovered from Lace during this period, at an average grade of 16 carats per hundred tonnes. Records showed that the grade increased at depth, with up to 21 carats per hundred tonnes having been recovered at the deepest level. In addition to the surface mining operation, a vertical shaft was sunk between 1928 and 1930 to a depth of some 340 metres, but this was never used to access the kimberlite as the mine was shut down in 1931.  Diamondcorp is in the process of bringing the mine back into production.

Earlier this week they announced via RNS that the new decline has successfully accessed kimberlite at the -260 meter bulk testing level. They also confirmed that the mine has been dewatered to -280 meters and that the 1.2 million ton per annum dense media separation plant at Lace has been recommissioned and audited in readiness for the processing of fresh kimberlite. Lace is expected to have a +25 year mine-life and is serviced by tarred roads, and has sufficient water supply and electricity from two sources.

We are now waiting now for the bulk testing to take place and from that the market will learn the mining grades and will be able to put a value on the mine. Mining will then begin. DCP hopes production will peak at 400k carats per annum by 2016. 

The diamond market collapsed in 2008 but has recovered strongly. A recent parcel of run-of-mine tailings sold by DiamondCorp at $94 per carat vs $33 per carat received in May 2009 at the bottom of the market. Firestone Diamonds recently sold 4850 carats at an average of $181/carat. The current market capitalisation for Diamondcorp (LON:DCP) is  £22.5m. They have sufficient funds to complete the decline.

I first bought in October 2010 and have traded in and out, missing most of the recent price decline. It's not without risk but in my opinion, aside from the usual mining hiccups that can occur, the only thing that stands in the way of a market re-rating is the result of the bulk-testing. We wait.

The author has a holding in Diamondcorp (LON:DCP)


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DiamondCorp plc is a United Kingdom-based diamond producer. The Company’s 74%-owned Lace diamond mine is located 200 kilometers southwest of Johannesburg in the Free State Province of South Africa. The project comprises the Lace kimberlite. Approximately 33 million tons of kimberlite have been outlined in the main Lace pipe between the 240 meter and the 855 meter level, containing an estimated 13.3 million carats of diamonds at an average estimated grade of 40 carats per hundred tons (cpht). Its subsidiaries include Diamondcorp Holdings Limited, Botswana Diamondcorp Limited, Lace Diamond Mine (Pty) Limited, which is engaged in diamond exploration, Soapstone Investments (Pty) Limited and DCP Exploration (Pty) Ltd. more »

Share Price (AIM)
7p
Change
0.3  3.7%
P/E (fwd)
n/a
Yield (fwd)
n/a
Mkt Cap (£m)
21.5



  Is Diamondcorp fundamentally strong or weak? Find out More »


22 Comments on this Article show/hide all

marben100 29th Sep '11 3 of 22

Topped up today @ 8.775p - a nice discount to the recent 13p placing! Clearly plenty of stock about and DCP remains high risk, but rather a lot of potential upside to pay for taking on that risk.

Cheers,

Mark

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smarm 29th Sep '11 4 of 22

In reply to marben100, post #3

My main reservation is how they will raise the money needed???

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marben100 29th Sep '11 5 of 22

In reply to smarm, post #4

Well... they appear to have ample funds for the time being. DCP needs to demonstrate the feasibility/profitability of its project using this pilot.

If the results of the pilot are satisfactory, they shouldn't have too much difficulty raising a relatively modest sum, and there's no huge time pressure to do so. Subject to satisfactory NPV and IRR figures for the project, based on the pilot, I for one would be prepared to back an open offer or rights issue. I hope that enough other investors would feel similarly.

Of course, one could play it safe and wait until a) the pilot is complete; and b) funds have been raised but, personally, I like to have a "foot in the door" at this point/price. The outlook appears promising to me. Should it complete a) and b) satisfactorily without the SP having risen much, then I'd be happy to add significantly at that point.

Cheers,

Mark

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smarm 29th Sep '11 6 of 22
1

In reply to marben100, post #5

Sure, they will need to raise money for the mine but I see your thinking. I am out at the moment but am keen to buy back when price looks likely to rise.

On the general subject of diamonds...

Interesting to see a price chart for diamonds - note the smaller size has dropped in price more than larger size.

Pretty much supports what another diamond producer - no names, no packdrill - said after their August tender.

http://www.pricescope.com/diamond-prices/diamond-prices-chart

S

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smarm 5th Oct '11 7 of 22

In reply to marben100, post #5

I am back in today. I'm a little disappointed at the 26 carats, I had hoped for higher but the NPV looks good against current valuation. There's been zero interest in the market, maybe people are just too shell-shocked to see the potential value.

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marben100 5th Oct '11 8 of 22

Hi smarm,

The report looks pretty good to me. Though the concentration of diamonds in the ore may not be huge, I find this highly encouranging:

...the consistency of the production and the fact that the parcel is not skewed in any way by one or two exceptional value stones leads management and the valuers at the SA Diamond Exchange to believe that a carat value of $160 should be consistently achievable from Lace production in the current market, taking into account that prices have weakened up to 25 per cent in recent weeks.

This carat value is 33.3 per cent higher than the Company's original base case of $120 per carat. Approximately 80 per cent of the diamonds recovered by weight are gem quality, and 37 per cent are larger than one-third of a carat. The biggest gem recovered is a 20.58 carat diamond.

 

This suggests to me that the Lace pipe contains plenty of good quality stones - leading to strong revenues and the high NPV and IRR figures quoted. IMO, and I expect Mike can confirm it, quality of what's in the pipe is more important than concentration. That because, AIUI, valutaion of stones doesn't go up linearly with size. More like exponentially! A 2ct stone is worth a lot more than 2x 1ct stones.

There are some negatives, however....

  • Clearly, mining the old workings proved more difficult than management anticipated
  • In the current financial climate, investors will be concerned about how DCP will raise the necessary funds and what dilution this might cause.
  • 19 months is estimated before full-scale production is reached - and we know that timescales/budgets are rarely met by miners! I hope that DCP will raise sufficient funds to have a decent contingency should things not go perfectly according to plan.
  • Less obviously, I understand that block caving is a difficult and risky mining technique, though well suited to Lace. Though I'm no expert, I understand that it involves large-scale blasting to fracture rock in bulk. If it goes wrong, that could be a major problem. I'm glad to see that DCP are employing a consultant experienced in block caving.

There's an animation showing how block caving works (though on a much larger scale than would be employed at Lace) here: http://www.resolutioncopper.com/res/mediacenter/101.html

The relevant bit starts around 3 minutes in.

 

NPV and IRR remain attractive relative to market cap., so I'm happy to have my "foot in the door". However, I will proceed with caution as DCP moves towards commercial production.

Cheers,

Mark

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marben100 19th Oct '11 9 of 22
1

I have spoken to the company about this morning's update. Significant points are:

  • A total of £12m - £15m is required to finance the Lace project (to include working capital requirements, as well as CAPEX) net of antificpated sales revenue during the development phase.
  • The company reports that market conditions are favourable for reaching an offtake deal, given the high quality of diamonds recovered so far. This deal should not cap prospective future earnings.
  • I suggested that an open offer might meet a favourable response from retail investors, given attractive project economics (NPV of £117m and 78% IRR quoted earlier this month, vs market cap £15.7m at today's placing price and allowing for shares issued in the placing) and the company indicated that it was certainly considering that option.

If the company does pursue an open offer, I'd almost certainly have some more shares at a favourable price - providing there is plenty of contingency in the finance to allow for the inevitable slippages/cost overruns.

As far as the shares placed today are concerned, though the price is galling for investors who bought above 10p the level of dilution is not too large and it provides much needed stability in the company's finances, IMO.

Cheers,

Mark

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Michael Van Moppes 28th Feb '12 10 of 22
1

In reply to smarm, post #6

smarm, your comment re prices for small diamonds.

The prices are based on rarity, and large stones are far rarer than small ones.

In 1964, De Beers invited me to South Africa to learn their business, as my family firm had been customers since the late 1800s. I spent a week at CDM, Consolidated Diamond Mines of South West Africa (now Namibia). The " mine" was the coastal strip north of the Orange river on the border with South Africa and extending 60 miles. It was 3 miles wide and 100 feet deep.

The first 95 feet was sand with no diamonds in it, and had to be moved to get to the buried beach sand ansd gravel, above the bed rock. The De Beers geologists told me that CDM was the largest continuous earth moving operation in the world, continous because some short term projects such as dam construction had been larger.

It is impossible to conceive the size of it, but I have a small guide. Have you seen a motorway under construction? The main earth moving is done by scraper loader machines, and the most I have seen in UK motorway building was 3 of them working as a team.

CDM had 300 of them.

In the life of the mine, a volume of sand and beach gravel, 60 miles by 3 miles, and 100 feet deep was moved, and the diamonds in the bottom 5 feet were extracted.

At the end of my week long visit, the mine manager took me to see the week's production, the result of the hard work of the 5,000 men employed there by De Beers.

Imagine a large diner plate, holding a fair number of diamonds. The had cleared a space in the middle, and between 6 and 10 large stones were there, the largest about the size of a 50p coin.

Largest continuous earth moving operation in the world, 5000 men and 300 scraper loaders. That is why big diamonds are valuable.

MadDutch.

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Michael Van Moppes 28th Feb '12 11 of 22

Mark, I have looked at Diamondcorp and as mining companies go, it loooks good.

My problem is, I know DeBeers very well, and have both great respect and enormous trust in them.

A monopoly that ran for over 100 years, cannot have done so unless it was completely straight. It used to be said that the were "the last retreat of the British gentlemen."

I just do not know whether I can trust any of the new diamond miners. But I do know that I have lost money on all the ones I invested in.

Mike

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Michael Van Moppes 28th Feb '12 12 of 22

More info;

The first edition of the book "Gemstones" by Walter Schuman has a page devoted to CDM. It has a picture of the famous diner plate, covered in diamonds, exactly as I remember it.

Another point. CDM's production was 90% clean (minimal internal inclusions) white transparant gemstones, and only 20% coloured industrials. Worldwide the split between the 2 types was 20% gem to 80% industrial.

Such a big % of the most valuable stones did effect to value of the mine's production.

I hope this information is useful.

Mike

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marben100 21st May '12 13 of 22

In reply to Michael Van Moppes , post #12

Hi Mike,

Sorry not to have said "thanks" sooner - I seem to have missed your posts. You're right that a trustworthy management is key. This is true of all early-stage natural resourcescompanies (including oil companies). There are a lot of rogues out there.

Personally, I need to see a long track record of delivery upon promises before I'm prepared to invest tyoo much in any such company.

Anyhoo... an important milestone in DCP's progress today: they've secured R280m of debt funding from South Africa's IDB (subject to due diligence etc). In March, they reported a new CPR, that showed a peak funding requirement for the project of R285m.

So, they now need to complete the loan requirements and, IMO, raise some more equity to cover extra contingencies, and the project can get underway. I'd better get cracking on studying the actual CPR, to see whether I like what I see. I have a small position at present.

Cheers,

Mark

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marben100 2nd Jun '12 14 of 22

Have just received DCP's annual report and notice of AGM (to be held in London on 27th June).

I note that the usual waiver of pre-emption rights is only over ~30m shares, equating to around 15% of currently issued share capital. Suggests to me that the company does not expect to have to dilute shareholders substantially over the course of the next year, so probable only needs to raise a relatively modest amount of equity capital.

The chief risk now, of course (and it's a big one) is of the mine development not going according to plan and the company finding itself financially squeezed by its bankers. I intend to attend the AGM and determine the degree of contingency built into the company's planning.

Cheers,

Mark

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marben100 12th Jun '12 15 of 22

Operational update out: http://www.investegate.co.uk/Article.aspx?id=201206120900011418F

Mainly concerns tailings retreatment, with ahead of expectations results, including recovery of a "fine 8.3 carat E/F sawable white gem diamond".

What I like about this announcement (and previous ones) is this:

The recovered grade of 7.33 cpht is 47% above the budgeted grade of 5.00 cpht. Based on management's previous tailings retreatment experience, the dump grade is expected to be variable, and progressively decline over time. This is because the old mine records show that the grade of the Lace kimberlite pipe improved with depth and the tailings from the deepest, higher grade mining are on the outside of the dumps. The recovered grade of the dumps is therefore expected to decline as mining progresses into the older dumps from the highest levels of the pipe where grades were historically lower.

To me, that speaks of management honesty - a rare and valuable commodity in the natural resources sector. Many companies I've come across would have simply omitted to mention an expected future decline in grade.

Of course, the tailings retreatment is merely a stopgap, that adds some useful revenues until development is complete and production proper gets underway. Mine production is expected to commence 18 months after development begins, reaching full production after 43 months.

Cheers,

Mark

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marben100 26th Jun '12 16 of 22

I'm going along to tomorrow's AGM. Hadn't previously got round to reviewing the March CPR. As I did so, I found that the resource report (appendix 1) is missing. Contacted the company and have now obtained the report (48pp). If anyone wants it please contact me by direct message.

Cheers,

Mark

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Susan Marmor 4th Jan '13 17 of 22

The deal with Tiffany looks great. They got money to build the mine and a buyer for their diamonds. I'm back in.

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marben100 4th Jan '13 18 of 22

In reply to Susan Marmor, post #17

I'm still holding. Formalities still need to be completed before the cash is released (was due before end 2012 but presumably should happen soon). Look forward to completion being announced and work commencing.

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Fangorn 7th Jan '13 19 of 22
1

DiamondCorp (LON:DCP) has signed binding legal agreements with Laurelton Diamonds, a wholly-owned subsidiary of Tiffany & Co. (NYSE:TIF) for a term loan of US$6,000,000 in exchange for an Off take Agreement for diamond production from the Lace mine in the Free State province of South Africa. The terms of the Loan are unchanged from those announced on 16 November 2012 and the completion allows the proceeds of the convertible bond issue (as announced on 17 December 2012) to be released from escrow and completes the funding required for the 47 level block cave development at Lace. The Loan will be drawn down in two equal tranches on 10 January 2013 and 10 April 2013 and bear an annual interest rate of 9%, must be repaid in full by 10 April 2021 and there will be no payments of interest or principal for the first three years of the Loan. The Loan can be repaid early in part or in full without penalty. The Off take Agreement will take effect from 10th January until the end of the life of the mine. Subject to any purchases by the South African State Diamond Trader, the off take Agreement will give Laurelton Diamonds, Inc. the right to purchase, on commercial terms related to fair market value, production from the Lace Mine which meets the quality and colour standards required to yield Tiffany quality polished diamonds. Special stones and those diamonds which do not meet the Tiffany standard will be excluded from the off take Agreement.

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MadDutch 7th Jan '13 20 of 22

I admire your tenacity, Mark, and wish you good luck in your investing.

Mike

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marben100 7th Jan '13 21 of 22

In reply to MadDutch, post #20

Well, things get interesting now: they actually get to build a mine! Will take time until results are known, but should be progress reports along the way. Now it's up to management to keep development on track.

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MadDutch 9th Jan '13 22 of 22

Now it's up to management to keep up its rewards for the shareholders!

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About smarm

Susan Marmor

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Susan Marmor has been trading her SIPP and ISA full time for 7 years.  She has made money every year since she started, including 2008.  She uses a blend of fundamentals and TA and she specialise in smallcaps. Also happy to take advantage of some of the high yielding FTSE100/250 stocks as a replacement for savings interest.  Her time horizon is not fixed and she can hold from anything from minutes to years. She posts on Twitter as stoplosssue. more »



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