Diamond junior Diamcor Mining (DMI-V) is flying high: The junior’s share price has gone from a low of 26¢ late last year to a recent 52-week high of $1.41.
The steady share price climb, aided by a tight share structure of 30 million shares outstanding, has mirrored the company's progress at its Krone-Endora operation, in South Africa. Diamcor is in the process of commissioning a 200-tonne-per-day modular processing plant at the project, and with trial mining starting, it's expecting its first sale of diamonds next month.
Diamcor president and CEO Dean Taylor isn’t surprised the company’s stock is rising at a time that’s proven difficult for the entire industry.
“We spent a lot of time ensuring the share structure was first and foremost because we really weren’t focused on going out and finding the next kimberlite or doing exploration,” Taylor said in a telephone interview from Kelowna, B.C.
Taylor, who joined the company in 2007, has a background not in diamonds, but in corporate acquisitions and restructuring companies. When he joined Diamcor in 2007, he was looking for advanced projects to acquire that could be rolled into production relatively quickly.
“My background has always been more or less in the consulting side of things and in acquisitions, really taking and restructuring companies or taking existing companies that are not at cash flow or don’t really have the right assets and going out and putting them together,” says Taylor, who has 15 years of experience as a consultant to U.S. and Canadian businesses on acquisitions and operations, and has served as vice-president of business development for the commericial arm of DirecTV in the U.S.
Bringing that experience to Diamcor has meant a focus on securing production, cash flow and dividends rather than exploration, Taylor notes.
Diamcor announced a deal to acquire Krone-Endora, a former De Beers project located next to the diamond giant’s famous Venetia mine in Limpopo province, in 2008. Its black economic empowerment partner Nozala Investments (a rural women's collective) owns 30% of the project.
The acquisition closed in early 2011, and since then, Diamcor has found itself a strategic partner in Tiffany & Co. (TIF-N) and built up onsite infrastructure, including a 200-tonne-per-hour modular processing plant, roads, fences and pipelines.
While Diamcor hasn’t yet done any economic studies for Krone-Endora, it is proceeding with trial mining on the basis of a 1.3-million-carat inferred resource in 54 million tonnes of material. The alluvial deposit, which has an average depth of about 15 metres, is also an eluvial deposit — a direct shift of material (the top 1 km) from the Venetia pipes next door. Higher-grade basal gravels average 5.86 carats per hundred tonnes, while the upper gravels (the top 7 metres of the deposit) average 1.63 carats per hundred tonnes.
Tiffany & Co. has a right of first refusal to purchase production from Krone-Endora at market prices. In return, Tiffany has provided $5.5 million in long-term financing through a $3.5-million, five-year term loan and a $2-million convertible debenture.
Tiffany is interested particularly in the 5-10% of Krone-Endora diamonds expected to be extremely high-quality stones.
“Normally when they get diamonds even as a sightholder from De Beers, they get a box, and it includes a variety of different diamonds,” Taylor says. “In this case, they can come in and be first in line. They still have to pay full pop for them, but being first in line and being able to take the pick of the crop every month. . . that’s a perfect scenario for them.”
Overall, roughly 65% of diamonds from the project are expected to be gem or near-gem quality.
Taylor says that the idea behind acquiring the project was not to increase resources right away, although the potential is clearly there. (The resource only represents a small area of the deposit, 3.1 sq. km out of a total project area of 58.9 sq. km). Rather, the focus was on beginning production in the area that hosts the bulk of the existing resource, known as the K1 area.
“The primary focus was ok, we’ve got seven to ten years worth of work in this immediate area and the grades are really quite phenomenal, it’s a known source of high-quality diamonds,” Taylor says. “Let’s just focus on advancing it through. . . so that we can go into production and generate maybe 10,000 carats a month on that immediate area.”
The company is targeting annual production of between 120,000 and 240 carats over ten years at Krone-Endora and believes it could bring in revenue of $20 million in its first year of operation, and $40 million in its second.
Once cash flow is established and the kinks of the operation are ironed out, the company plans to complete bulk samples to update the resource at the same time. Taylor says that once regular production is established, the company will be able to complete a preliminary economic assessment very easily to support a potential move to a major exchange from the TSX Venture and to provide metrics for investors to measure the project’s potential.
While operations at the moment are restricted to five days a week, 10 hours a day, the company has applied for full mining rights at the site, which would allow operations to continue around the clock, seven days a week. Taylor says the permits, which the company applied for over a year ago, should come through anywhere between late 2012 and the first quarter of next year.
From the time initial testing commissioning of the plant began in late June to the end of August, 7,831 tons of material, was processed, yielding 1,214.86 carats of diamonds. That included one diamond that weighed 9.83 carats, three that were between 4 and 5 carats, and five that were between 2 and 3 carats. Eighty-five stones weighed 1 carat or more, together weighing 154.3 carats. The test material was a combination of concentrate secured as part of the project’s acquisition from De Beers and lower-grade material from the upper, lower-grade layer of the deposit (up to 7 metres depth) in the K1 area.
“We were really pleased obviously with the recoveries in terms of stones and quality and amounts and everything just at the very surface,” Taylor says.
De Beers’ Venetia mine, a much larger operation, regularly recovers 200-carat plus diamonds. Taylor says Diamcor expects to recover some large stones as well in the 30-carat to as high 200 carats range, though it isn’t relying on those special stones and hasn’t factored them into its model.
“The one to four carat zone is really the sweet zone, because if you look at most engagement rings, they’re usually from half a carat or three-quarters of a carat to two carats,” Taylor says, noting that polished stones generally end up about half the weight of the original rough stone. “That’s the bread and butter — everybody comes in to look at the big dollar stuff, but at the end of the day, those are the stones that typically get sold the most.”
In addition to the processing plant, the company has screening equipment in the quarry that can handle 600-800 tonnes per hour. Current efforts are focused on reducing the amount of material that goes through the plant by screening out the large volume of fines in the deposit in advance. Diamcor has already reduced the fine material (less than 1 mm in size) hauled for processing by 45% using a mobile screening unit in the quarry. The company believes it can screen out up to 75% of the fines more with additional dry-scrubbing and screening equipment.
Once its mining licence comes through, Diamcor expects to ramp up production to 10,000 carats a month. In the current trial mining stage, Taylor estimates production is currently between 2,000 and 4,000 carats a month, depending on the grade of the material being processed. If all goes well, the modular processing plant could be expanded to produce 20,000 carats a month within two to three years.
Diamcor expects to have roughly 10,000 carats which it will begin to sell off in November, with a second sale expected in January. The sales will provide an average per-carat value for Krone-Endora stones. In a 2009 technical report, the average diamond value was pegged at US$130 per carat for lower gravel diamonds and US$70 per carat for upper gravel diamonds, but the company says the numbers are conservative.
Taylor says the company already has a few thousand carats, but didn’t want to do a valuation yet because the sample isn’t representative. So far it only represents the lower-grade, (and lower-value) upper 7 metres of the deposit, but machinery in the quarry are now digging deeper to get a good cross-section of the deposit.
In addition, only material smaller than 10 mm is currently being processed at the plant, with any larger material being stockpiled until it can be treated properly. The larger material, which Taylor estimates at about 20% of the volume of the deposit, will require additional screening before it’s run through the plant and will be stockpiled until the company buys and installs dry-scrubbing equipment.
Regarding the drop in diamond prices that has occurred over the past year, Taylor says he isn’t too worried they will derail what is expected to be a very low-cost operation with high-value stones.
“We deal pretty much specifically with high-quality stuff that goes to Tiffany’s,” he says. “There’s really always a great demand for those types of stones.”
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