DiamondCorp - Bulk Testing News on the Horizon

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

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

Mike

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.

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

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

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

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

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

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

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

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

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

Thanks also to Fangorn for pointing me towards Petra Diamonds (LON:PDL) 's preliminary results. the commentary on the gem diamond market/out look is as follows:

Whilst supply to the market is forecast to remain constrained, demand for diamonds continues to rise in both established and new markets as global wealth and consumer spending increase.  De Beers calculates that the global diamond jewellery market grew by over 8% in 2010, whilst the US, which remains the largest single consumer market for diamonds with around 38% of global demand, grew by over 7% in 2010.  Demand in emerging markets grew at substantially higher rates. The fastest growing new consumer markets for diamonds are China and India, both of which recorded double digit growth in 2010, up over 25% and 31% in local currency respectively. These markets are predicted to continue their rapid expansion, accounting for more than 50% of incremental growth over the next five years, and the Far East (China, Hong Kong, Taiwan, India & the Gulf) is expected to eventually account for around 40% of global demand by 2015 (source: De Beers).

 

As far as Petra's tender results are concerned, prices rose steadily from October 2010 to the end of the Period. Although our post Period tender saw prices off the June 2011 highs, Petra (along with many other industry participants) is confident that prices will continue to remain strong. Positive results from industry bellwethers Tiffany's and Signet demonstrate that consumer demand remains robust. In China and India, many new diamond jewellery stores need inventory and this is driving a large portion of the wholesale demand. Investment demand for diamonds is also rising, given their appeal as a hard asset investment class, and several new physical diamond investment funds launched during the Period. Recent economic uncertainty may however cause some volatility in rough pricing in the short term.

Whilst the market is clearly very jittery about commodity prices short-term, due to the forecast slowdown in OECD economies, IMO these jitters are overdone.Though slower growth is also forecast in China, the growth expectation still remains very strong, and I see no grounds for believing that demand for commodities will reduce in the medium/long term. Gem diamonds in particular have always been viewed as a safe, fungible asset and benefit from much greater portability and easier storage than gold! Hence my view is that prices should at least remain stable over the medium/long term, even if there is a short-term "panic sale".

It is also my view, shared by a number of industry analysts, that many miners and oilies have been oversold, as the market overemphasises downside risks and doesn't price in likely current/future commodity prices and pricing pressures.

DCP's shares may well have been hit by this phenomenon. Of course, DCP remains high risk because it has not yet fully/successfully completed the pilot and doesn't yet have sufficient funding to move to full-scale production (though the hurdle isn't too high ~£19m gross CAPEX requirement estimated).

Cheers,

Mark

Continuing the discussion started here, that Mike responded to as follows:

I did not know Diamondcorp before, so thanks for showing me. It looks like a well run diamond mining business which could make a good investment. My only reservation so far is why they need so many financial people on their boards of directors. I make it 4 people with diamond mining and business experience, but nine from the financial markets; stockbroking, banking etc. I would check how much of shareholders money they will be creaming off for themselves, and whether their skills are really needed.

They do have 2 good diamond people. Steve West at Lace mine is a De Beers man, and that is very good. Also Nicholas Allen comes from CAST, from memory (I hate acronyms!) Consolidated African Selection Trust who were very active in diamonds in the 1960s when I was employed by the family business. He also comes from Drukker who were diamond tool competitors, much respected by my family firm, from memory active in manufacturing diamond drill bits, I believe they were merged into the division of France's St Gobain, where our various busineses now are.

Firstly, concerning the Board, it is worth noting DCP's structure. Firstly, the Board of the Plc comprised 7 directors. Three of these appear to be mining professionals, and the other four financiers. However, one of the financiers, the representative of major shareholder EIIB, left the Board following his departure from EIIB on 19th September, reducing the current number of main Board members to 6.

Subsidiary Lace Diamond Mines Pty (LDMP), the operating subsidiary for the Lace mine, is 74% owned by DCP, with 13% shares held by each of two BEE partners. Of the seven members of LDMP's board, three represent the BEE partners.

I think that adequately explains the preponderance of Board members with a financial/commercial background (rather than operational). Most importantly, the 2010 Annual Report shows total Board remuneration of £231.2K (£137.5K for the CEO + 1.9m options). That strikes me as reasonable for a company of this size.

I did wonder whether the company might have run short of cash, as a loan balance of £1.15m has to be repaid by 16th October (see Note 3 to the Interim Results to June 2011). However, the cash balance at 30th June was £2.4m and the company has raised a further £3.5m gross this quarter, by placing shares @ 13p - so should have adequate cash to complete the pilot programme - especially when supplemented by revenues from diamond sales.

Best,

Mark