African Diamonds was established to develop diamond mines in Botswana and West Africa. The target is to have a producing mine within three years. Having a balanced portfolio of projects will help reach the objective. The current portfolio of the Company consists of:
JV in Botswana with Lucara to fast track the development of our licences to our goal of large gem stone quality diamond mine;
late stage exploration projects which are known to contain diamonds or diamond indicator minerals; and
early stage high potential concessions, both alluvial and hardrock.
FinnCap said that African Diamonds’ AK6 project in Botswana will be the most lucrative new open pit hard rock diamond project to enter production in the next 10 years. The stockbroker initiated its coverage with a ‘buy’ recommendation, targeting 108p per share. The analyst believes that the recently upgraded top-end diamond valuation, of US$200/carat, could prove to be conservative.
Earlier this week, African Diamonds received the latest diamond valuation, and at US$162 a carat, the valuation exceeds the company’s previous projections. The valuation is US$23 per carat higher than prices used in the current AK6 development studies. The new valuation also indicates the possibility of a US$200 per carat value at production, African Diamonds said.
According to FinnCap, the US$200 valuation could be a conservative estimate. The analyst stated that up to 20% of the South lobe of the three kimberlites at AK6 could contain ultra-pure Type II diamonds similar to those produced at Gem Diamonds’ (LSE: GEM) 70%-owned Letseng mine in the Kingdom of Lesotho. According to Letšeng, its diamonds sell for the highest per carat price of any kimberlite mine.
“The key difference is that the estimated production grade of AK6, at 25 carats per hundred tonnes, is twentyfold that of Letseng. Less than 2 per cent of annual global rough diamond production is Type II”, Lunn said. “To us, the implications for AK6 are clear: this mine is set to produce substantial positive cash flow over its 12 year open pit life”.
Furthermore, the broker noted that the project’s new partner Lucara Diamond Corp (TSX-V: LUC), who raised C$110 million to finance its buy out of De Beers, suggests that institutional appetite is returning for quality diamond projects. Finncap said that African Diamonds and Lucara enjoy a good working relationship and both parties are committed to build a mine to start production in Q4 2011.
The stockbrokers price target and valuation is based on a 12 year open pit mine, and assumes that African Diamonds will exercise its recently gained option to take its overall interest in AK6 to 40%.
The AK6 diamond discovery in Orapa, Botswana, is being developed through a joint venture between African Diamonds and Lucara, an associate of Lundin Group. African Diamonds currently has a 30% interest in the project and Lucara owns the remaining 70%.
AK6 is situated on ground once held by De Beers prior to 2002, and it was through a De Beers / African Diamonds joint-venture that the pipe was discovered in 2004. Lucara acquired De Beers' stake in the project for US$49 million in November 2009.
Previously, African Diamonds noted that the new Lucara venture is more favourable than the previous De Beers partnership. Under the Lucara partnership, the company has the option to increase its stake in AK6. African Diamonds intends to exercise its option for £5 million and increase its interest to 40%. Another attractive benefit of the new venture is that now African Diamonds has the right to market its own percentage of the AK6 diamonds. In January, Teeling said the company’s position had greatly improved in recent months and Lucara has removed the project’s previous uncertainty.