Firestone Diamonds (LON:FDI) is finally poised to transform into a major diamond producer. The path has been long, hard and at times serially disappointing but having survived an almost 100% implosion of the diamond market in 2008, Firestone has emerged as a company on the cusp of major production. In 2008, diamond prices (rough) fell from $190 to around $110 per carat. At that price mining projects were mothballed and the industry more or less shut down but not Firestone, they kept plugging away, sometimes changing direction, and at times infuriating shareholders with dilutive fund raisings. As we reach mid-2011, the news flow looks a lot better.
Firestone is one of just 3 listed kimberlite producers outside the majors. They focus on Lesotho and Botswana and have some high quality projects:
- Production at Liqhobong and BK11
- Evaluation of 108 kimberlites in the Orapa and Tsabong kimberlite fields
- Exploration potential for discoveries at Tsabong
There have not been any significant new diamond mine finds for a long time and global reserves are falling. There could be less than 20 years of known reserves left in the world (source BHP Billiton, De Beers, Firestone estimates), so looking forward it’s hard not to see a supply/demand imbalance creeping into the market at some point. And Firestone are ready to benefit from it.
Liqhobong is one of the most attractive underdeveloped kimberlite resources in the world. Situated in Lesotho, it was originally discovered in 1950’s. The main pipe is estimated to contain 90 million tonnes @ 34 carats per hundred tonnes, giving a total gross value of 28.7m carats with $4B value (sources: Firestone, ACA Howe/MPH Consulting). The mine produced from 2005-2008 and Firestone bought the mine Q4 2010 with mining license in place and resumed production in Q1 2011.
Development in 2011 is funded by December 2010 financing, and steady state production has been achieved in Q2 2011 (Source: Firestone). Eventually there will be two Plants. Expansion plans for Plant 1 in 2011 see targets of 1.3 million tonnes per annum (mtpa) capacity by Q4, targeting 37,000 monthly carats with an annual revenue of $57m. Plant 2 follows 18 months on and targets 2.5mtpa and annual revenue of $110m. 12 months on from there the target is 4.2 mtpa with annual revenue of $185m. Plant 2 will be funded from Liqhobong and BK11 cash flow and debt. Grid power is expected at Liqhobong H1 2012.
BK11 has resource of 12mt and should generate revenue up to $24 per tonne with operating costs of around $9 per tonne (Source:Firestone). Commercial production commenced July 2010 and mine life is expected to be 10 years.
In summary, Firestone is well placed to grow into a major producer. Liqhobong and BK11 alone forecast a non-discounted annual profit in the region of $147m per annum and there are the evaluation and exploration projects as well. FDI has a current market cap of £98m. News of the latest sale (due shortly) should reassure the market that everything is on target and if nothing goes wrong from here, famous last words where any mining project is concerned, then the price should see a significant re-rating at some point.
Disclosure: As at the date of publication (June 16th 2011), the author held shares in Firestone Diamonds (LON:FDI)
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