Proactiveinvestors Australia

DiamonEx – Diamonds in Botswana and the US

Tuesday, April 15, 2008 by Stuart Watson

Now that the diamond market has been released from the clutches of De Beers, numerous mining juniors are targeting new discoveries. Few of these firms are making money but one of AIM’s latest entrants, Brisbane-based DiamonEx, is about to commence production in Botswana and has multiple prospective licences in the same country and in the US.

As any single girl will no doubt testify, diamonds are notoriously difficult to find. They are usually located near the surface in resources known as kimberlites or lamproites, and also in alluvial deposits that washed away from these resources. Most diamond mines are based on kimberlites and, according to figures from BHP Billiton, only around 4,000 kimberlites have been identified globally and just 3% of them are economic.

Lerala Diamond Mine, Botswana

DiamonEx acquired its key asset, Lerala, in a tender process in 2002. It’s a kimberlite deposit that was discovered by De Beers a couple of decades ago. De Beers defined a 3 million carat resource in the early 1990s but then decided it was too small for its purposes.

Subsequent testing by DiamonEx has since seen the grades revised upwards and the indicated resource increased to 3.7 million carats at an average grade of 27.41 carats per hundred tonnes. There’s potential for this to be revised even higher. The current figure is based on four pipes to depths of 110m. One of these pipes, K003, could extend as far as 150m. Luckily for DiamonEx, this is also the best of the four, accounting for 2 million carats of the existing resource. A fifth pipe, K006, is not included in the resource and could add a further 80,000 carats or so.

In 2004, DiamonEx listed on the Australian Stock Exchange at A$0.20. A second listing on the Botswana Stock Exchange followed a few months later. Work then began on a feasibility study, which was completed at the end of 2006. This indicated a mine with a 10-year life producing 330,000 carats a year and costing $24m. Adding K006 and the deeper section of K003, neither of which is included in the current resource, could extend the mine life to 15 years.

Construction of the mine began in 2007. After some recent rain delays, production is expected to commence in June 2008. Sales will be conducted ten times a year through WWW International Diamond Consultants Ltd, who also carried out the diamond valuation in the feasibility study. The average price received is expected to be $58 per carat this year suggesting revenues of $19m in the first year increasing to $30m plus with the forecast growth in diamond prices.. The world average per carat is around $70 with the Botswana average around $100. While this is quite low for Botswana and just below the world average, , fortunately Botswana offers excellent infrastructure which keeps operating costs lower than any other diamond regions in the world. In addition, the capital cost of the mine is just $24 million, a fraction of the cost to develop a diamond mine elsewhere, so the return on equity is strong.

Cash costs, including marketing fees and royalties, are expected to be around $11.5 per tonne. The mine plan is forecasting a throughput of 1.32 million tonnes of ore a year, suggesting a total annual cash cost of $13m. After interest costs, the profit margin in the first full year will be around 10% of sales, but both the research analyst and broker covering the stock here in the UK, Edison and Fox Davies, expect diamond prices to increase steadily year on year, relying on forecasts from WWW International Diamond Consultants. The steady growing diamond demand curve matched by a sliding supply curve supports this view which will see DiamonEx’s profit margin grow considerably over the course of the next few years and beyond. They also point out that diamond mines often surprise to the upside, especially if a few large stones are found as these sell for disproportionately higher prices.

DiamonEx has paid for the construction of Lerala with a mixture of equity and debt. A convertible loan of A$10m was raised last year with interest payable of 13% per annum over its four-year life. 10% of the loan can be converted into shares. An eight-year 5m euro debt facility has also been taken out. Despite this, DiamonEx has already flagged that A$2m of additional working capital may be required if completion of the mine is further delayed.

Exploration in Botswana

The cash produced by the Lerala mine should fund DiamonEx’s exploration programme going forward. In Botswana it’s hunting in three areas that are all 100% owned. Although they have been explored before, newer techniques are being applied this time around which is hoped will yield better results.

The Martin’s Drift licences host the Lerala mine and the neighbouring Tswapong region to the east, covering a total of 350 sq km. Soil sampling has been taking place immediately south of the K002 pipe and results are expected sometime in the second quarter of this year.

Tuli is a much larger block, covering 12,354 sq km to the north and east of Lerala. Diamonds have been recovered here since the 1950s in bulk stream samples. Spectral imaging surveys have been carried out and DiamonEx is currently compiling results from the subsequent surface samples.

The final area of interest in Botswana is Jwaneng, a 3,015 sq km block in the south of the country, where around 20 targets are being followed up by surface sampling in the second quarter of this year. This district also hosts the Jwaneng mine, which produces 15 million carats a year and is the world’s largest diamond mine measured by the dollar value of its output. Not a bad neighbour to have.

Exploration in the US

DiamonEx fourth exploration area is Sloan in north Colorado. It was acquired by DiamonEx in November 2007 and there is a five-year option to evaluate two pipes that cover 9.3 hectares. No JORC resource is available but, based on drilling by previous companies, the tonnage could be double that of Lerala at half the grade and is still open at depth. The value per carat, however, has been estimated at $150. Putting this all together means total revenues over the life of any mine could be more than double that of Lerala.

A bulk sampling programme for the two pipes at Sloan should begin “as soon as weather conditions permit” with the aim of getting a parcel of over 3,000 carats for evaluation. All going well, a drill program would then follow to define a resource. In addition to Sloan, other targets have also been identified in the area and a drilling programme covering seven of them is expected to start shortly.

DiamonEx’s next quarterly update is due at the end of April. As well as news on Lerala there should be progress reports on all of its key prospects. The company intends to get one further exploration project to production within the next three years. For the moment, the smart money looks to be on the considerable upside potential of Sloan, or of course acquisition.

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