DiamondCorp* (DCP LN) 11p mkt cap £20m - Miners push into diamond bearing kimberlite

BUY - Target Price 23p

http://www.diamondcorp.plc.uk/

http://www.diamondcorp.plc.uk/im/press_display.php?Id=1561685&yr=2011

• DiamondCorp's team of expert miners are pushing into fresh kimberlite at the Lace diamond mine.
• The South African diamond mine has remained flooded and untouched for around 50 years till now with miners now entering the mine at the 260m level. The mine is now dewatered to the 280m level despite exceptional rains this year at around two times the normal rate so far this year for the Orange Free State in South Africa.
• The team have prepared the diamond processing plant to process diamonds from the mine in an initial 30,000t bulk sample. A first 5,000t batch is to be mined and processed within the next two weeks.
• Recovered stones will be valued and held back for sale as part of a larger parcel. We expect the plant to recover significantly better stones than seen in the tailings recovery and for the full parcel of stones to fetch a markedly better pricing.
• Diamonds from the tailings recovery sold for a relatively good $95/ct despite their small size and poor state. Pink and purple diamonds are found at the mine along with some yellows as well as more conventional stones.
• Recovery of better size ranges should increase the value per carat significantly raising the project's value and increasing its appeal to other diamond miners.
• The full bulk sample should be mined by mid-June with recovery of the stones completed shortly after.
• The mine is fully permitted and the plant has capacity to process around 3,300t per day and can easily keep pace with the bulk sample mining rate.
• Mining is progressing carefully into the kimberlite this week due to roof conditions in the transitional zone. The mining rate should accelerate as the tunnelling splits into new sections and the use of larger drilling equipment speeds up the mining and development process.
• The rise in diamond prices and potential for better than forecast diamond receipts should more than offset rising electricity and other costs in South Africa.
• Some elements of the mine development plan have altered due to power and other costs with management opting to use a conveyor to take material to surface. This saves on the capital cost of refurbishing the old shaft and removes the need to 'raise' a further ventilation shaft.
• Risks: If a moderate sample of stones is recovered then mining should continue and better stones may be recovered from larger scale mining as seen in historical records. We also need to hope that the historical mine plans are accurate and that the old timers have not previously accessed the 260m level without recording this in the plans. If this is the case then mining should drop down to the next level for the sample incurring further development costs.
• Valuation: our valuation of 23p/s at a 12% discount rate assumes a mine diamond valuation of US$120/carat. We also assume that the mine starts with a grade of 24.4carats per hundred tonnes processed rising to 43.5cpht by 2017.

Conclusion: DiamondCorp is one of the most interesting companies around for short term potential gain. Historical documents and expert reports suggest that the bulk sample could reveal better grades and diamond values than we have modelled above. Nature has distributed the diamonds within the kimberlite and this will determine the results seen over the next few weeks. It's a better than even wager that we should be surprised on the upside.

*Fairfax act as Nomad and broker to Diamondcorp

Source : Fairfax

7/3/11

DiamondCorp* (DCP LN) 15.75p mkt cap £29m - Fully funded to bulk sample

TP - 23p

DiamondCorp is pushing rapidly ahead with the re development of the Lace Diamond Mine in South Africa. We have valued the company based off an NPV of the Lace Diamond mine at 23p/share. At a recent visit we were impressed with the progress the team has made at site despite recent excessive heavy rains. The company is expecting to complete a bulk sample and grade assessment in April-May, with diamond values from tender soon after in early June. This will resolve the uncertainties concerning the mine's economic prospects. We have not attributed value for the exploration tenements in Botswana.

Valuation - We have valued DiamondCorp at 23p/share based off an NPV (12% discount rate) of the Lace Diamond mine starting production at annualised 258,000/year rising to 461,000carats/year as the grade rises from 24.4cpht to 43.5cpht by 2017 as grades rise with depth. We have maintained flat diamond prices, exchange rates (cost base in rand) and inflation for this valuation. We note that our diamond price assumption at US$120/carat is likely to be very conservative in light of the US$94/carat achieved recently on a parcel of run of mine tailings.

Development: Since refinancing last year DiamondCorp has been able to rapidly re-start development work at its principal historic Lace Diamond mine. A 30kt bulk sample is due to be completed in May with stone valuation expected in June that will sign off the resource. A positive result would lead to a major re-rating of the company as the asset's economic parameters are confirmed.

The mine is fully permitted and has a working 1.2mtpa diamond recovery plant on site. A decline is being developed to take a bulk sample, after which management plan to move ahead and complete the mine, continuing the development of sub level caving and re-fitting the existing shaft.

Upside Potential - As alluded to above, there is considerable upside potential through the valuation of fresh diamonds from the kimberlite following the spectacular results recently achieved from processing tailings. Further value could follow from higher grades. The grades currently used and signed off by Snowden are based off a combination of historical data (when the asset was last mined early in the 20^th Century prior to the Great Depression), and the diamond content of the tailings. However, a higher grade phase was typically left behind by historical miners as the rock was too hard. If this higher grade material sits in the shallower levels where mining starts, then grades could well exceed expectations which would have a very substantial positive impact on valuation. The company could also see further positive newsflow from exploration from the Botswana exploration package where drilling has returned very encouraging results.

*Fairfax act as Nomad and broker to Diamondcorp

Source : Fairfax

24/2/11

DiamondCorp* (DCP LN) 12.75p mkt cap £23.44m - Spectacular results from run of mine tailings processing

Corporate - TP 23p - Buy

DiamondCorp has received spectacular results from the sale of 1,321 carats recovered from tailings processing at the Lace Diamond Mine. The company realised a price of US$94/carat versus US$55/carat in September 2008 the last time tailings were tendered prior to the collapse of the market and around the previous peak in rough prices. In May 2009 tailings diamonds were sold at US$33/carat at the bottom of the market. The implication on a potential valuation for stones from fresh kimberlite run of mine production is very exciting.

• The stones recovered were typical run of mine tailings production, with all diamonds offered for sale being sold. The parcel contained gems ranging from 6 carats to less than 2mm and included 31% boart (non gem) diamonds. This result bodes particularly well for stones to be recovered from the kimberlite, for which a 30kt bulk sample is due to be processed by April, and a valuation most likely in early June (June quarter).
• We have upgraded our valuation for DiamondCorp from 19p to 23p following a site visit just after Indaba. This follows a reduction in the dilution from 20% to 10% across the life of mine. The study completed by Snowden last year signed of 20% which was very conservative, and following the company's success with developing the decline demonstrating the teams competence we feel that this should be reduced to a more realistic level. In the early years of mining 10% could even be too high.
• We were greatly encouraged by the progress that the company has made in the past year or so since re-financing and restarting activities in March last year. The decline is well advanced, only around 200m from the bulk sampling level, the team has clearly been pushing ahead rapidly with work. We also saw the plant working and successfully recovering diamonds from the historic tailings. Excavation has been hampered by recent excessive rains in the region, although in the life of an asset these problems are minor.
• Valuation: Our valuation at 23p/share of DiamondCorp is from an NPV of the Lace Mine using a 12% discount rate. We assume a 30 year mine life starting at 258,000carats/year (up from 230,000carats due to change in dilution) and rising to 460,000carats/year by 2017 as grade is expected to rise with depth from 24.5cpht to 43.5cpht over this period. Cash costs are expected to run at around US$60/carat falling to US$33/carat as the grade rises. Costs are based largely in Rand, for which we have assumed a rate of SAr7/US$. We have used a carat value of US$120/carat, which in light of today's results may be very conservative. Due to uncertainties over exchange rates, evolution of diamond prices and local inflation we have kept all of these factors flat for our valuation. Capex is expected to be around US$16m this year with a further US$3.5m of debt to be paid down this year all to be financed through equity and cashflows during development. The company is fully financed to the bulk sample and penultimate debt payment. We have factored in Black Empowerment into our valuation in the form of an internal shareholder loan paid out of cashflows.
• Upside potential: Today's results imply that our assumed US$120/carat could be well short of the mark, and the impact higher diamond prices could have on the company's valuation is substantial. We currently value the company at 23p, however, if normalising the last diamond sales from kimberlite to current market conditions the stone value would be closer to US$140/carat which would take our valuation to 30p/share. However, tailings values can imply fresh kimberlite stone valuations of 1.5-2 times this level. At 2x valuation or US$188/carat then our numbers imply a valuation of 43p/share.

Conclusion: The next few months are looking increasingly exciting and we eagerly await the results of the bulk sample that could outperform from a grade perspective as well as a stone valuation. Lace is looking increasingly likely to be a highly attractive diamond asset with considerable upside potential. The exploration portfolio in Botswana is also looking very interesting and bulk sampling is planned that has the potential to lead to another economic asset, although we have not attributed value for this as yet.

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